Several months after the Florida Southern District Court sided with Apex Clearing in the multi-district litigation brought by traders caught up in the January short squeeze, the company faces another complaint.

On June 22, 2022, Apex filed a motion to dismiss the fourth amended complaint against it related to the January 2021 short squeeze.

The putative class action is brought on behalf of Apex’s customers and other individual investors who claim to have suffered losses as a result of the defendant’s decision to block them from purchasing shares of AMC Entertainment Holdings, Inc, GameStop Corporation, and Koss Corporation for nearly three-and-a-half hours on January 28, 2021.

The defendant is a broker-dealer for certain direct customers and provides clearing broker services to introducing broker-dealers and their customers.

Leading up to January 28, 2021, individual investors began purchasing large numbers of shares of AMC, GME, and KOSS. The increased demand for these stocks drove share prices up and led to a “short squeeze.” In a “short squeeze,” individual investors like the plaintiffs typically “stand to benefit . . . as the value of the stocks they purchased increases. Short sellers, on the other hand, risk further losses, as stock prices rise as a natural consequence of market forces.”

In response to the ongoing market volatility, at approximately 10:31 a.m. on January 28, 2021, Apex blocked its direct customers and directed its introducing broker-dealers to block their customers from purchasing shares of AMC, GME, and KOSS.

The defendant has maintained it restricted trading due to potential future collateral requirements the National Securities Clearing Corporation (“NSCC”) appeared it may impose on the defendant as part of the margin system NSCC maintains to comply with the Securities and Exchange Commission’s standards for covered clearing agencies.” Specifically, the defendant received an NSCC report at 8:30 a.m. projecting substantially increased collateral requirements.

Apex claims that the Fourth Complaint largely mirrors the last complaint Plaintiffs filed in this Court. But, despite Plaintiffs’ additions in this round (adding a new claim for “Breach of the Implied Covenant of Good Faith and Fair Dealing” and finally acknowledging the existence of the parties’ binding customer agreements), and even with the benefit of voluminous pre-complaint discovery, Plaintiffs fail to state a claim for the same reasons Plaintiffs’ earlier complaints failed.

Simply put, according to Apex, the traders’ common law claims should be dismissed because they depend on non-existent duties that would be at odds with the complex and comprehensive federal regulatory scheme governing the securities industry, and because the parties’ customer agreements unequivocally authorize Apex to engage in the challenged conduct. This Court also should dismiss Plaintiffs’ claims for lack of Article III standing.

Apex says that the plaintiffs are speculators in “meme stocks” who helped create and then chased a market bubble. Plaintiffs admittedly colluded in “online discussions” to create unprecedented market volatility for a group of “meme stocks,” which on January 28, 2021 resulted in 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.

Plaintiffs allege that Apex’s response to the DTCC’s unprecedented collateral requirements was somehow negligent. But Apex’s limited trading restriction on new purchases of three of the volatile “meme stocks” (GameStop, AMC, and Koss) for a few hours on a single day, while continuing to allow customers to sell their positions in those stocks, was consistent with—and the direct result of—Apex’s obligation to meet its capital requirements.

Apex says:

“State tort law does not impose a separate legal duty that would have required Apex to ignore its federally-mandated collateral requirements. Nor does state tort law forbid clearing brokers from exercising sound business judgment in deciding whether to accept new orders for highly volatile stocks. Nor does it require clearing brokers like Apex to absorb the risk of continued trading—particularly when the SEC endorsed the use of trading restrictions during the volatility of January 2021 and acknowledged that brokers’ customer contracts typically allow such restrictions.”

The defendant also slams the traders seek as unprecedented: No court has imposed the extraordinary duties sought here for clearing brokers to unconditionally cover market events. Clearing brokers have never been required to provide unlimited capital at times of extreme market volatility.

According to Apex, the traders cannot allege the necessary elements of their common law claims for negligence, breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing, and tortious interference. As to negligence, courts universally hold that as a clearing broker Apex owes Plaintiffs no duty of care. And Plaintiffs’ allegations about Apex’s response to unprecedented collateral requirements fail to support even an inference that Apex breached any standard of care.

Plaintiffs allege only that (a) Apex was too cautious by restricting trading too quickly in the face of unforeseen risk and should have anticipated Plaintiffs’ proposed “duty to dicker” with DTCC, (b) Apex was too cautious in removing those restrictions too slowly, and (c) Apex should have had on hand effectively limitless capital to cover any and all collateral requirements.

As to breach of the implied covenant of good faith and fair dealing, Plaintiffs fail to allege that the Customer Agreements create the “special relationship” required under Texas law to impose a duty. And Plaintiffs fail to allege Apex breached an implied covenant under New York law because Plaintiffs cannot allege that Apex acted in a manner inconsistent with the Customer Agreements or improperly deprived Plaintiffs of their contracted-for benefits.

As to Plaintiffs’ tortious interference claims, pleaded “in the alternative”, the only conduct alleged is a re-plead of mere negligence—“failing to have a reasonable plan in place” – which is not the intentional conduct required to plead this tort. In addition, to survive a motion to dismiss on this claim, Plaintiffs expressly must allege the specific terms of the contract with which Apex supposedly tortiously interfered.

Apex argues that by strategically omitting the specific terms of the contracts that Plaintiffs now acknowledge existed between Plaintiffs and Apex, Plaintiffs defeat their own claim.

Further, according to Apex, Plaintiffs’ allegations also fail to support any inference that Plaintiffs suffered any non-speculative injury, let alone that Apex’s conduct was the proximate cause.

Moreover, according to Apex, Plaintiffs lack Article III standing. They do not allege that they would have purchased additional shares of the three meme stocks Apex temporarily suspended mid-day (GME, AMC, and KOSS) in the absence of Apex’s temporary restriction. Instead Plaintiffs’ wishful thinking that they would have timed the market correctly and sold their shares for some additional profit is speculative, implausible, and the type of “some day” assertion that is insufficiently concrete and particularized to allege injury.

Also, the state common law duty Plaintiffs seek to impose intrudes into the heavily enforced and uniform federal regulatory scheme for the interstate trading of publicly-listed securities—with the SEC and SEC-regulated self-regulatory organizations (SROs) providing exclusive, plenary regulation over the trading of securities over stock exchanges. Plaintiffs’ state law claims present an obstacle to federal regulatory objectives as set forth in the Securities Exchange Act of 1934.

Finally, Apex says that the traders cannot, as a matter of law, bring claims for tort damages on behalf of meme stock purchasers whose brokers did not use Apex’s clearing services. Apex is not a public utility and has no duty to take on additional risk to protect meme stock purchasers with whom it has no relationship.

Those claims must be dismissed, Apex concludes.