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Appert v. Morgan Stanley Dean Witter

November 6, 2009

SUSAN APPERT, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
v.
MORGAN STANLEY DEAN WITTER, INC., DEFENDANT.



The opinion of the court was delivered by: Honorable David H. Coar

MEMORANDUM OPINION AND ORDER

Susan Appert brings an action against Defendant Morgan Stanley Dean Witter, Inc., for breach of contract due to Defendant's conduct in charging "Order Handling" fees in connection with securities transactions. Before the Court is Defendant's motion to dismiss the complaint in its entirety. Defendant argues that Plaintiff lacks a private right of action to enforce securities exchange rules, the violation of which forms the gravamen of Plaintiff's complaint. In the alternative, Defendant submits that Plaintiff's claim is precluded by the Securities Litigation Uniform Standards Act. For the reasons stated below, the motion is GRANTED.

I. Background

Defendant Morgan Stanley Dean Witter is a financial services firm that provides, among other things, brokerage and investment advisory services. Plaintiff Susan Appert maintained an investment account with Defendant from at least 1999 through September 2006. (Compl. ¶ 1.) Plaintiff seeks to represent a class of Defendant's customers who had an "Order Handling" fee retained or deducted from their accounts in connection with a securities transaction. (Id. ¶ 5.) Plaintiff alleges that the components of the fee ("handling," "postage," and "insurance") were not defined, and that Defendant never disclosed to the Plaintiff the actual costs incurred, if any, for handling, postage, or insurance relating to any transaction. (Id. ¶ 14.) Plaintiff further alleges that Defendant charged the "Order Handling" fee of $5.00 without regard to whether insurance was needed, the amount of postage required, the size of the order, the type of the order, or if handling took place. (Id. ¶ 15.) Plaintiff finally alleges that Defendant's retainer of $5.00 "Order Handling" fees was, in fact, unrelated to any actual handling, insurance, or postage associated with a specific transaction. (Id. ¶ 21.)

Plaintiff argues that language in her Client Account Agreement and trade confirmation slips impose on Defendant a contractual duty to follow rules of the National Association of Securities ("NASD") (now the Financial Industry Regulatory Authority, "FINRA") and its stock exchange ("NASDAQ"), requiring members to observe "high standards of commercial honor and just and equitable principles of trade" and to ensure that charges for miscellaneous services "shall be reasonable and not unfairly discriminatory between customers." (Id. ¶ 16-18.) Plaintiff asserts a claim for breach of contract against Defendant based on Defendant's practice of retaining "Order Handling" fees unrelated to handling, insurance, or postage, in contravention of these rules. (Id. ¶ 21.)

Among the common questions of law applicable to her proposed class, Plaintiff asks whether the NASD and NASDAQ rules were incorporated into account agreements; whether the fees violate "high standards of commercial honor" within the meaning of these rules; whether the fees are "unreasonable" within the meaning of these rules; whether the violation of these rules breaches Defendant's contracts with Plaintiff and class members; and whether the fees are, in whole or in part, disguised profits. (Id. ¶ 9.)

II. Standard of Review

The purpose of a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) is to test the sufficiency of a complaint. Weiler v. Household Finance Corp., 101 F.3d 519, 524 n. 1 (7th Cir.1996). To survive the motion, a complaint need only describe the claim in sufficient detail to give the defendant fair notice of the claim and its basis. Fed. R. Civ. P. 8(a)(2); Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, (2007). A plaintiff's factual allegations must suggest a plausible, rather than merely speculative, entitlement to relief. Tamayo v. Blagojevich, 526 F.3d 1074, 1083 (7th Cir. 2008); see also Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009); Bell Atlantic, 550 U.S. at 555. In ruling on a motion to dismiss, the court must construe the complaint in the light most favorable to the plaintiff, accepting as true the well-pleaded allegations, and drawing all reasonable inferences in plaintiff's favor. Tamayo, 526 F.3d at 1081.

III. Analysis

A. Private Right of Action

In asserting a claim for breach of contract, Plaintiff alleges that Defendant's practices violate NASD and NASDAQ rules requiring members to observe "high standards of commercial honor and just and equitable principles of trade" and to ensure that charges for miscellaneous services "shall be reasonable and not unfairly discriminatory between customers." Defendant argues that Plaintiff's breach of contract claim asserts a private right of action where none exists. See Spicer v. Chicago Bd. Of Options Exchange, Inc., 977 F.2d 255 (7th Cir. 1992) (holding no implied private right of action under the Securities Exchange Act against exchange members for violation of exchange rules).

Plaintiff concedes that no private right of action exists under NASD or NASDAQ rules. However, she argues that Defendant has incorporated the rules into their agreements and is therefore contractually obliged to follow them under state common law. Plaintiff's argument regarding the contractual incorporation of NASD and NASDAQ rules rests on two paragraphs in the terms and conditions of Plaintiff's trade confirmation sheets and Client Account Agreement. The former document contains the following clause:

All transactions are subject to the rules, regulations, requirements, and customs of the exchange or market (and its cleaning agency, if any) where executed, the regulations of the Federal Reserve Board and the Securities and Exchange Commissions. (Ex. A at 2.)

The latter document states the following: Securities accounts are subject to federal and state law and the rules and customs of the NYSE, the NASD, and other industry ...


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