As a multi-district litigation against dozens of brokers, clearing houses and hedge funds involved in the January short squeeze continues at the Florida Southern District Court, Apex Clearing – the defendant in the “Other Broker” tranche of the lawsuit, has sought to dismiss the allegations against it.

First off, let’s explain what Apex is accused of. The plaintiffs are investors in “meme stocks”, with the lead plaintiffs in this tranche being Erik Chavez and Peter Jang. They sue Apex Clearing Corporation for negligence, breach of fiduciary duty and tortious interference with a business relationship, demanding a trial by jury.

According to the traders, on the morning of January 28, 2021, Apex unilaterally and abruptly blocked its direct customers and directed its introducing broker-dealers to block their Shared Customers from purchasing shares of AMC Entertainment Holdings, Inc. (AMC), GameStop Corporation (GME), and Koss Corporation (KOSS) for a period of time lasting approximately three hours and twenty-five minutes. The plaintiffs allege that Apex’s decision to implement this trading suspension was designed to and foreseeably impeded additional price appreciation and suppressed the prices of AMC, GME, and KOSS.

Further, the traders claim that Apex shut down the demand-side of AMC, GME, and KOSS based on a possible future collateral requirement, that Apex had confirmed and kept in place, for approximately three hours after receiving notice that the actual collateralization number was lower and was, in fact, at a level that Apex believed warranted lifting the shutdown.

The plaintiffs also allege that Apex failed to take reasonable steps to protect its customers and investors in times of market volatility.

The traders claim that by imposing restrictions on only one side of the transaction – the buy side- Apex not only deprived Plaintiffs and Class members of the ability to purchase the Suspended Stocks, but it intended to and did cause the price of the Suspended Stocks to spiral downward to artificially suppressed prices by allowing selling to continue.

As a result, Plaintiffs and Class members were forced to sell at artificially suppressed prices or watch as the value of their holdings fell precipitously.

Plaintiffs assert claims for negligence, breach of fiduciary duty and tortious interference with a business relationship on behalf of themselves and the Class.

On October 15, 2021, Apex Clearing filed a motion to dismiss the complaint in the Court. In the document, seen by FX News Group, Apex says that the traders not only were chasing a market bubble, but also helped create the bubble in meme stocks. Apex notes that the plaintiffs colluded among themselves in “online discussions” in public forums to create unprecedented market volatility in and demand for a group of “meme stocks,” and that on January 28, 2021, it was the resulting unprecedented and historic trading volume that led the SEC-regulated clearing agencies (DTCC and NSCC) to increase collateral requirements for Apex, a clearing broker responsible for maintaining sufficient cash to cover the buy and sell obligations of its broker-dealer customers.

Regarding the duties that Apex allegedly owes to the traders, the company argues that the named Plaintiffs are not direct customers but introduced customers, and Apex owed the named Plaintiffs no duty of care, nor any fiduciary duties. As such, Plaintiffs Jang and Chavez have suffered no legally cognizable injury.

In this case, Apex claims it owed no duty to Plaintiffs Jang and Chavez because, as a clearing broker, Apex did not undertake to act on behalf of investors such as the named Plaintiffs and because, more fundamentally, brokers (whether clearing brokers or not) are not public utilities and owe no duty to investors to accept new orders. Moreover, Texas law does not impose a general duty of care to prevent economic injury.

According to Apex, even if it owed some duty of care to the traders, they fail to allege anything to support their proposed duty of providing unlimited capital and assuring constant availability. Apex is not an exchange or a public utility, required to continue operating its clearing services all day, every day, without interruption, even when doing so would create hazards to its business.

Plaintiffs complain that Apex acted too quickly when it took emergency action to pause purchases of three of the meme stocks. But, according to Apex, the traders “have it backwards”. Instead of alleging “negligence,” Plaintiffs allege that they were harmed by an overabundance of caution by Apex; they allegedly were harmed by a surplus of care, not a lack of care.

Apex claims that Plaintiffs’ theory is that Apex was too careful in taking decisive emergency action to ensure it remained in compliance with its federal capital requirements. State tort law simply does not punish actors in negligence for having used an overabundance of caution—for having used too much care.

Apex says that Plaintiffs’ first theory of negligence highlights the backwards nature of Plaintiffs’ claims. Plaintiffs complain that Apex simply acted too decisively to limit the risk that DTCC’s collateral requirements would impose, “without even trying to confirm the collateralization number received from DTCC at approximately 9:30 a.m. on January 28, 2021, or seeking to negotiate it down.” But the DTCC’s collateralization numbers are not subject to negotiation.

Even if it could be considered negligence to take quick and decisive action (one hour after receiving NSCC’s notice) to limit risk in response to unprecedented market conditions, Plaintiffs allege that what Apex should have done instead was “negotiate” with the NSCC regarding the collateralization requirements. According to Apex, the traders misunderstand these requirements; they are not, as the Complaint supposes, an opening offer to a negotiation about what type of collateral is required under SEC regulations and FINRA rules.

The Complaint summarizes the Net Capital Rule as a duty “to maintain sufficient liquid assets to meet all obligations to customers.” Apex argues that nowhere do the rules force clearing brokers to take on more obligations. The Rule requires only that the existing “obligations” be covered. The suspension of trading was to meet the obligations of existing Apex customers.

The Plaintiffs turn the Net Capital Rule on its head to read it as a duty to provide unlimited capital to cover unlimited future obligations, Apex says, adding that the Rule nowhere imposes such a draconian duty. Apex concludes that “the imposition of such a duty would discourage firms from becoming clearing brokers in the first place, at war with the democratization efforts of the SEC in 1975 and beyond”.

Apex notes that the NSCC’s communications are simply a real-time estimate and calculation of the necessary capital under the SEC’s and FINRA’s requirements. A company has no duty to perform futile acts such as disobey the capital requirements in the hopes that the NSCC might calculate different ones.

Notably, if Apex had continued to permit purchases, the 9:30 a.m. collateralization demand had been correct, and the demand had continued to grow at the same exponential pace as it had from the prior day, then Apex very quickly and very easily could have violated the SEC’s Net Capital Rule—effectively promising to settle trades that it lacked the capital to cover.

According to Apex, the plaintiffs urge this court to create out of thin air a brand new “duty to dicker” rather than take decisive action in the face of potential threats from market volatility. But such a duty not only does not exist, it also could well be deleterious to future investors. If clearing brokers were not permitted to decide to discontinue clearing for a period of time in response to collateral requirements, but rather were required to continue clearing at ever-increasing levels of risk while trying to get the NSCC on the phone to “negotiate,” then clearing brokers would be at greater risk of failing to maintain adequate collateral, and even greater harm to Plaintiffs and others would occur, Apex says.

For the foregoing reasons, Apex requests that the Court dismiss the Other Broker Tranche Common Law Amended Complaint with prejudice as to Apex for lack of subject matter jurisdiction and failure to state a claim.