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AER Advisors, Inc. v. Fidelity Brokerage Services, LLC

United States Court of Appeals, First Circuit

April 17, 2019



          David 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.

          Ira D. 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.

          Before Thompson, Circuit Judge, Souter, [*] Associate Justice, and Lipez, 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).[1] 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.

         How the Case Got Here

         We draw 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).

         Parties' Dealings

         At all 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.

         Starting 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."[2] But they declined, saying they had no interest in lending stock.

         Apparently 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.

         On June 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.


         Sometime 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 SAR.[3] 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.

         In 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.

         Proceedings in the Southern District of Florida

         Invoking 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 relations.

         Fidelity 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.

         Noting "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.[4] 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, 64-65 (2013).

         Proceedings in the District of Massachusetts

         Again 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 ...

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