Traders respond to Apex Clearing attempt to dismiss complaint in short squeeze lawsuit
A couple of weeks after Apex Clearing sought to dismiss another complaint in a multi-district litigation related to the January 2021 short squeeze, the plaintiffs have responded to Apex’s arguments.
In documents filed in the Florida Southern District Court on July 6, 2022, a group of traders insist that securities brokers have a duty to act in good faith and in the best interest of their customers. The traders argue that on January 28, 2021, Apex Clearing Corporation violated its fundamental, well-established duties by taking unprecedented action. It prevented its customers from buying certain highly liquid, in-demand stocks for approximately 3-1/2 hours for their own financial self-interest and to the financial detriment of their customers.
The plaintiffs argue that this Market Suspension was designed to and did cause Apex’s own customers to lose money on the very same stocks that Apex had previously sold to those customers. Apex concedes that if the trading price of AMC, GME and/or KOSS went up, Apex perceived a risk to its ability to meet a potential increased collateral funding obligation.
Even though Apex was advised by regulators on January 28 that its collateral requirements would be within Apex’s tolerance, Apex nevertheless took affirmative steps to directly interfere with market forces to the detriment of its customers, and foreseeably impeded the price movement of these stocks in the market for its own self-serving purposes.
The traders note that much of Apex’s defense rests on the proposition that it is a clearing broker-dealer. Apex argues that inasmuch as many of its customers, including Plaintiffs, traded through introducing brokers, such as Webull and Ally, Apex is shielded from liability.
According to the traders, the law only protects clearing broker-dealers in connection with their ministerial, back-office type functions. Plaintiffs’ Amended Complaint alleges that Apex’s Market Suspension, which it imposed on all of Apex’s direct customers and on its network of captive introducing broker- dealers (including shared customers, such as Plaintiffs), went far beyond the ministerial functions that shield clearing broker-dealers from liability.
Moreover, they say, Apex’s customer agreements cannot protect Apex from the misconduct alleged here, as it is black letter law that tortfeasors such as Apex cannot contract themselves out of tort liability.
The traders say that Apex’s purported justification for its unprecedented unilateral Market Suspension is demonstrably false. Apex claims it acted to avoid a possible regulatory collateral call “if Apex clients were permitted to continue” to purchase the Suspended Stocks. But even if Apex’s purported justification for its unilateral Market Suspension was true, then Apex improperly failed to prepare itself for the possibility of a regulatory collateral call in violation of industry rules.
The plaintiffs claim that, at or about the time that Apex implemented its unprecedented Market Suspension, it had already been advised by the regulators that no such heightened collateral call would be forthcoming. Moreover, even after Apex confirmed with the regulators that no collateral call would be required on January 28, Apex continued to restrict its customers’ ability to purchase the Suspended Stocks for hours, artificially driving down prices and ensuring market losses on the part of Plaintiffs and others.
Plaintiffs and the classes they seek to represent allege that Apex should be accountable for its actions. Accordingly, Plaintiffs allege claims for Negligence, Breach of Fiduciary Duty, and, alternatively, Breach of the Implied Covenant of Good Faith and Fair Dealing and, also, alternatively Tortious Interference.
Plaintiffs do not allege that broker-dealers have an unlimited duty to sell all securities to all people. They argue, however, that a broker-dealer cannot engage in self-serving affirmative acts such as the Market Suspension knowing that such action is at the direct and immediate financial expense of its customers while at the same time the broker-dealer gains the advantage of its’ own customers’ losses for its own financial benefit through reduced collateral requirements.
According to the traders, Apex’s Market Suspension was not a mere ministerial function. Apex’s refusal to sell securities is not at issue – they can do that in the abstract. As to damages, Apex argues that Plaintiffs and all investors could have sold their stock. True, but saying that a customer can sell stock after Apex had already taken action that was designed to and did force the price of the Suspended Stocks to go down means that those customers suffered damages proximately caused by Apex, the traders conclude.