The Southern District of Florida has granted defendant Apex Clearing Corporation’s motion to dismiss a securities suit against them. While Judge Cecilia Altonaga ruled the plaintiffs did have standing to sue over Apex halting purchases of so-called “meme stocks,” Apex, as a clearing broker, has no fiduciary duty or obligation to its shared customers.
The order affects one part of the sprawling multidistrict proceeding concerning the January 2021 short squeeze.
Apex is a broker-dealer who, as is relevant to this case, executes stock trades as a clearing broker from two classes of customers. The order describes how Apex executes trades for direct customers, who work directly with Apex, and shared customers, who are brought to Apex by a third party like Webull Financial LLC who is mentioned specifically in the case. As cited in the order, New York law does impose a fiduciary duty on introducing brokers, in this case Webull and Ally Investment Securities, LLC, but clearing brokers are excepted from said duty.
As has been reported by Law Street, in January 2021, a trading war commenced between large investment firms who had shorted so-called meme stocks and retail investors who bought said stocks, largely users on Reddit. The stocks skyrocketed in value.
Court documents recount that on January 28, fearing that they would have to put up more collateral than they thought they could, Apex halted all buy orders for meme stocks. This affected not only their direct customers, but also retail traders who wanted to buy through third parties like Webull and Ally. This caused meme stocks to drop in value, and investors were allegedly forced to sell at artificially lowered rates leading to the collapse of the short squeeze. As it turned out, court documents show that Apex need not have feared for its own financial security. The plaintiffs alleged that Apex was wrong to halt buy orders and to keep them halted for as long as they did, and as such, they owed investors damages.
In their motion to dismiss, Apex not only argued that the plaintiffs had no standing, but also that they had no obligation, as a clearing broker, to the plaintiffs. The court rejected the arguments as to the former, but accepted those to the latter. Judge Altonaga stated that New lork Law only imposes a fiduciary responsibility on clearing brokers when they actively engage in trading themselves instead of as a conduit for others and/or when they engage in fraud. As neither is the case in this suit, the plaintiff’s claims were dismissed.
Apex was represented by White & Case LLP. The defendants were represented by Grossman Roth Yaffa Cohen, P.A.; Safirstein Law LLC; and Kantrowitz, Goldhamer & Graifman, P.C.