Peter Jang v. Apex Clearing Corporation

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[DO NOT PUBLISH]

In the

United States Court of Appeals

For the Eleventh Circuit

____________________

No. 23-10436

____________________

In re: JANUARY 2021 SHORT SQUEEZE TRADING

LITIGATION,

___________________________________________________

SANTIAGO GIL BOHRQUEZ, et al.,

Plaintiffs,

PETER JANG,

ERIK CHAVEZ,

Plaintiffs-Appellants,

versus

SOFI SECURITIES LLC, et al.,

Defendants,

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2 Opinion of the Court 23-10436

APEX CLEARING CORPORATION,

Defendant-Appellee.

____________________

Appeal from the United States District Court

for the Southern District of Florida

D.C. Docket No. 1:21-md-02989-CMA

____________________

Before ROSENBAUM, NEWSOM, and LUCK, Circuit Judges.

PER CURIAM:

Trading stocks can be risky. In January 2021, thousands of

investors jumped into the field. Many of these individual investors,

like the plaintiffs in this case, decided to take a long position. That

is, they bought stocks to sell later, acting on a bet that the stock

price would rise so that they could pocket the difference between

a lower buy price and a higher sell price. But many other investors

took a short position. Those in the short position had borrowed

stocks, sold those borrowed stocks to other investors, and needed

to buy back the now-sold stocks to pay off their original loans.

They had bet that the stock price would fall and that they would

pocket the difference between the higher sell price and the lower

buy price.

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23-10436 Opinion of the Court 3

Meanwhile, retail investors on social media noticed that in-

stitutional investors were taking heavy short positions against

stocks like Gamestop (“GME”), AMC Theaters (“AMC”), and Koss

Corporation (“KOSS”) (together, the “meme stocks” or the “sus-

pended stocks”). Their bets made sense; those companies seemed

to be floundering, and their stock prices seemed sure to fall further.

But on January 13, prices instead shot up as retail investors banded

together to buy shares of the heavily shorted meme stocks en

masse. In the next two weeks, stock prices reached one record high

after another as other retail investors joined in the buying frenzy,

and panicked institutional investors raced to close their short posi-

tions to minimize their already massive losses. The result was ex-

treme market volatility.

The plaintiffs in this case (“Investors” or “Plaintiffs”) and

other retail investors took the long position in this short squeeze.

They bought shares of the meme stocks—and would have contin-

ued buying shares on January 28, 2021. But on that day, at Defend-

ant Apex Clearing Corporation’s direction, their brokers barred

them from buying any additional shares for hours, all while allow-

ing sell orders. The Investors argue that this one-way trading sus-

pension suppressed the appreciation of the prices of the meme

stocks. Put simply, the Investors bet big on the stocks but claim

they didn’t win big because Apex interfered with the short squeeze.

So like many other investors, Plaintiffs came to court to

make up for those losses. Here, they allege that Apex is liable for

negligence, breach of fiduciary duty, breach of the implied

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4 Opinion of the Court 23-10436

covenant of good faith and fair dealing, and tortious interference

under New York law for its trading suspension. Upon considera-

tion of the parties’ briefing, the record, and the relevant law, and

with the benefit of oral argument, we affirm the district court’s or-

der dismissing their complaint.

I. Background

A. Factual Background

1. The Parties

Apex Clearing Corporation is a securities broker-dealer, a fi-

nancial entity that executes securities trades. It interacts with its

customers in one of two ways.

In some cases, Apex acts as a broker-dealer for its direct cus-

tomers. These customers directly purchase and sell securities

through Apex’s trading platform.

But in other cases, Apex acts as a clearing broker for the cus-

tomers it shares with other broker-dealers. These shared custom-

ers open investment accounts with other broker-dealers (“intro-

ducing brokers”). But because the introducing brokers don’t have

the same operational capacity, they contract with Apex to provide

their customers with a trading platform, clearing services, and a

variety of other backroom and administrative functions. Apex

served as a clearing broker for Investors Eric Chavez and Peter Jang,

shared customers who worked with introducing brokers Webull Fi-

nancial LLC (“Webull”) and Ally Invest Securities (“Ally”), respec-

tively.

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Critical to Apex’s role as a clearing broker is its membership

in the National Securities Clearing Corporation (“NSCC”). The

NSCC is the main clearinghouse that clears and settles stock trans-

actions in the United States and is a subsidiary of the Depository

Trust and Clearing Corporation (“DTCC”). Together, the DTCC,

NSCC, and their members guarantee that stock trades are com-

pleted even if a buyer fails to pay for the securities he purchased or

the seller fails to deliver the securities he sold. In performing this

function, the clearinghouses, along with their member clearing

brokers, reallocate to themselves the risks that buyers and sellers

might otherwise bear.

Because it is on the hook for potential defaults in every trans-

action to which investors agree, the NSCC imposes a variety of

risk-management rules on their member clearing brokers. Under

these rules, Apex must post collateral for the trades that Apex has

agreed to process but hasn’t yet cleared. The NSCC calculates this

collateral requirement by considering several factors, including

market volatility. If the market is particularly volatile, the NSCC

might apply a volatility multiplier to its collateral calculation.

Apex must post collateral at the start of each day and again

during the day if the NSCC determines the market is volatile.

These margin requirements protect the clearinghouse, the clearing

brokers, and the investors from defaults.

But these requirements aren’t the only rules by which Apex

must abide. As a registered entity with the Securities and Exchange

Commission (“SEC”), Apex must “‘at all times have and maintain

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net capital’ no less than the greatest of the minimum requirement

applicable to its business.” This Net Capital Rule “protect[s] . . . the

market as a whole from the systemic risk that highly volatile stocks

can produce, especially when a broker’s position has significant risk

concentration in such stocks.”

Apex is also registered with the Financial Regulatory Au-

thority (“FINRA”), a non-governmental securities regulator.

FINRA mandates that its members “observe high standards of

commercial honor and just and equitable principles of trade.” It

also requires that its members make an agreement to clear for an

introducing broker on a fully disclosed basis that “specif[ies] the re-

sponsibilities of each party to the agreement including at a mini-

mum . . . (A) Opening and approving accounts[,] (B) Acceptance

of orders[,] (C) Transmission of orders for execution[,] (D) Execu-

tion of Orders[,] (E) Extension of Credit[,] (F) Receipt and delivery

of funds and securities[,] (G) Preparation and transmission of con-

firmations[,] (H) Maintenance of books and records[,] and (I) Mon-

itoring of accounts.” FINRA Rule 4311(c)(1).

Based on this FINRA requirement, Apex enters into a Cus-

tomer Agreement with introducing brokers and its shared custom-

ers. The Customer Agreement states that Apex has “the right to

refuse to execute securities transactions for the Customer at any

time and for any reason.”

2. The Short Squeeze

In the six days from Thursday, January 21, to Wednesday,

January 27, 2021, GME’s price underwent a nearly nine-fold

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increase, shooting from $43.03 to $380.00. AMC and KOSS’s prices

experienced similar rocket rides over the same period.

Then, the next day, at 9:30 a.m. on January 28, 2021, Apex

received an unconfirmed report from the NSCC that showed Apex

would need to make “a substantially increased clearing deposit.” It

hadn’t expected such a high collateral requirement and wasn’t pre-

pared to post those funds. Despite its surprise, Apex didn’t confirm

the collateral requirement with either the NSCC or the DTCC.

Instead, to manage the risk that it couldn’t meet an increased

margin requirement, Apex imposed certain trading restrictions on

the activity causing market volatility—meme stock trading. Two

hours after it received the unconfirmed report, around 11:30 a.m.,

Apex barred its direct customers and shared customers from buy-

ing shares of the meme stocks. In the case of its direct customers,

Apex refused to accept any purchase orders. And in the case of its

shared customers, Apex directed introducing brokers to refuse to

accept any purchase orders. Introducing brokers complied with

this direction. Still, Apex permitted its direct customers and shared

customers to continue to sell shares of the meme stocks.

Apex also set margin requirements for the Meme Stocks at

100%.

Apex soon learned that the unconfirmed report was incor-

rect. By 11:41 a.m., the DTCC was aware that Apex’s “collateral

exposure was going down.” So the clearinghouse called Apex at

11:47 a.m. to report that the new collateral requirement “was in

fact lower [than projected at 9:30 a.m.] and in line with [Apex’s]

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expectations and ability to pay[.]” This downward projection con-

tinued throughout the day, and ultimately, Apex didn’t pay any ad-

ditional collateral on January 28.

Despite these developments, Apex maintained its trading

suspension until 2:55 p.m.—a total of three hours and 25 minutes.

B. Procedural History

Retail investors across the country filed lawsuits against

Apex and other broker-dealers for imposing trading restrictions on

the meme stocks during the short squeeze. The Judicial Panel on

Multidistrict Litigation consolidated these cases into a multi-district

litigation (“MDL”) in the Southern District of Florida and separated

the cases into four “tranches.” In re Jan. 2021 Short Squeeze Trading

Litig., No. 1:21-md-02989 (S.D. Fla. Apr. 1, 2021). Plaintiffs are pro-

ceeding on the “Other Broker Tranche” in this MDL. They bring

state-law claims against Apex on behalf of themselves and a puta-

tive class of Apex customers. 1

1 Plaintiffs have proposed two classes. The first class is a Nationwide Investor

Class of all investors in the United States who (1) held meme stock shares or

call options at the end of the trading day on January 27, 2021; (2) sold their

shares or options at a loss between January 28, 2021, and February 23, 2021,

or whose options expired as worthless during that period; and (3) who suffered

damages. The second class is an Apex Broker-Dealer Class of all Apex’s direct

customers and shared customers who (1) held meme stock shares or call op-

tions at the end of the trading day on January 27, 2021, and had to sell their

shares or options at a loss or whose options expired as worthless between Jan-

uary 28, 2021, and February 23, 2021; (2) placed a sale order on meme stock

shares or call options and whose orders were delayed between January 28,

2021, and February 23, 2021; or (3) placed buy orders for meme stock shares

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The district court ordered Apex to produce significant dis-

covery at the outset of this litigation. After reviewing this discov-

ery and upon order by the district court, the Investors filed a master

complaint for the Other Broker Tranche.

In their first complaint, the Investors alleged a single claim

for negligence against Apex. They quickly amended their com-

plaint in response to Apex’s motion to dismiss the first complaint

and added claims alleging breach of fiduciary duty and tortious in-

terference. But the district court dismissed this second complaint

for lack of subject-matter jurisdiction without considering the sub-

stance of the Investors’ claims.

The Investors then filed a third complaint against Apex in

the Southern District of New York. Over the Investors’ objection,

the MDL panel transferred the case from the Southern District of

New York to the MDL in the Southern District of Florida. Imme-

diately after transfer, the district court ordered the Investors to

amend their complaint to plead diversity jurisdiction.

So on June 15, 2022, the Investors filed their fourth com-

plaint, which is now the operative complaint in this litigation. In

this complaint, the Investors allege four claims against Apex: (1)

negligence, (2) breach of fiduciary duty, (3) in the alternative,

breach of the implied covenant of good faith and fair dealing, and

(4) in the alternative, tortious interference. They incorporated into

or call options that Apex initially accepted but ultimately rejected between

January 28, 2021, and February 23, 2021.

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10 Opinion of the Court 23-10436

this complaint the Customer Agreement, the discovery Apex and

other defendants produced in the MDL, an SEC staff report, and

congressional testimony on the January 28, 2021, short squeeze.

Apex moved to dismiss the Investors’ complaint for a third

time. As a threshold matter, Apex argued that the Investors lacked

standing to sue under Article III. It also asserted that federal secu-

rities law preempts the Investors’ claims and that all four claims fail

as a matter of law. The Investors contested each ground for dis-

missal.

The district court granted Apex’s motion in part. In re Jan.

2021 Short Squeeze Trading Litig., No. 21-2989-MDL, 2023 WL

418821, at *19 (S.D. Fla. Jan. 9, 2023). At the outset, the district

court clarified that New York law governs this action because New

York has a strong interest in this litigation. Id. at *9. It then rejected

Apex’s standing and preemption arguments. Id. at *9–13. And fi-

nally, the district court concluded that all four claims fail as a mat-

ter of law. So it dismissed the complaint with prejudice. Id. at *13–

19.

The Investors now appeal the district court’s dismissal of

their complaint.

II. Standard of Review

We review de novo the district court’s dismissal of a com-

plaint for failure to state a claim under Federal Rule of Civil Proce-

dure 12(b)(6). Godelia v. Doe 1, 881 F.3d 1309, 1316 (11th Cir. 2018)

(citing Hill v. White, 321 F.3d 1334, 1335 (11th Cir. 2003) (per cu-

riam)). In reviewing this motion, we must “accept the factual

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allegations in the complaint as true and construe them in the light

most favorable to the plaintiff.” Echols v. Lawton, 913 F.3d 1313, 1319

(11th Cir. 2019) (citing Mills v. Foremost Ins. Co., 511 F.3d 1300, 1303

(11th Cir. 2008)). We also review de novo the district court’s inter-

pretation of state law. Godelia, 881 F.3d at 1316 (citing Tampa Bay

Water v. HDR Eng’g, Inc., 731 F.3d 1171, 1177 (11th Cir. 2013)).

III. Discussion

A. The Investors failed to allege a claim for negligence under

New York law.

We start with the Investors’ negligence claim. Because we

are a federal court sitting in diversity and this case arises under New

York law, we apply New York’s substantive law. See Admiral Ins.

Co. v. Feit Mgmt. Co., 321 F.3d 1326, 1328 (11th Cir. 2003). We fol-

low the precedent of the state’s highest court unless none is availa-

ble. Pendergast v. Sprint Nextel Corp., 592 F.3d 1119, 1133 (11th Cir.

2010). In that case, we follow the decisions of the state’s interme-

diate courts of appeals unless we are convinced that the highest

state court would rule differently. Id. (quoting Bravo v. United

States, 577 F.3d 1324, 1325 (11th Cir. 2009)).

To make their prima facie case under New York law, the In-

vestors must show (1) that Apex owed them a duty of care; (2) that

Apex breached that duty; and (3) that they suffered an injury as a

result of Apex’s breach. See Solomon v. City of New York, 66 N.Y.2d

1026, 1027 (N.Y. 1985).

In the operative complaint, the Investors assert that Apex

was under two duties: (1) to ensure that its trading platforms could

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“reliably deliver [trading] services” during periods of market vola-

tility, and (2) “to exercise reasonable care in safeguarding [their] in-

vestments” by promptly executing their trade orders. On appeal,

the Investors clarify that Apex owed them a duty not to refuse their

trade orders “for hours for the express purpose of torpedoing the

market price of securities . . . either for its own conflicted financial

benefit . . . or for no business reason.”

The district court determined that the Investors failed to al-

lege a duty recognized under New York law. In re Jan. 2021 Short

Squeeze Trading Litig., 2023 WL 418821, at *17. We agree.

1. The economic-loss doctrine bars the Investors’

negligence claim.

The first hurdle the Investors must overcome to establish

that Apex owed them a duty is the economic-loss doctrine. 2 Courts

apply the economic-loss doctrine “when determining whether tort

claims are maintainable alongside breach of contract claims.” IKB

Int’l, S.A. v. Wells Fargo Bank, N.A., 40 N.Y.3d 277, 290 (N.Y. 2023).

Under the economic-loss doctrine, plaintiffs can’t maintain tort

claims against a defendant for “purely economic loss” unless they

show that the defendant owed an independent duty to protect

2 As the district court correctly explained, courts applying New York law some-

times refer to the economic-loss doctrine as the economic-loss rule. In re Jan.

2021 Short Squeeze Trading Litig., 2023 WL 418821, at *13 n.12. But in fact, the

economic-loss rule is a “related but distinct” legal principle not at issue in this

case. See Ambac Assurance Corp. v. U.S. Bank Nat’l Ass’n (“Ambac I”), 328 F. Supp.

3d 141, 158–59 (S.D.N.Y. 2018); Travelers Cas. & Sur. Co. v. Dormitory Auth.–

State of N.Y., 734 F. Supp. 2d 368, 378 n.15 (S.D.N.Y. 2010).

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23-10436 Opinion of the Court 13

them “against the risk of harm”—a duty that “may arise from a

special relationship.” 532 Madison Ave. Gourmet Foods, Inc. v. Finlan-

dia Ctr., Inc., 750 N.E.2d 1097, 1101, 1103 (N.Y. 2001).

New York imposes this requirement to plead an independent

duty for two reasons: (1) to prevent tort claims that are duplicative

of those that should sound in breach of contract, IKB Int’l, 40

N.Y.3d at 290–91; and (2) “to avoid exposing defendants to unlim-

ited liability to an indeterminate class of persons conceivably in-

jured by any negligence in a defendant’s act,” 532 Madison Ave., 750

N.E.2d at 1101.

Here, the Investors allege a purely economic injury in their

claim for negligence, so they must establish that Apex owed a duty

to protect them against the risk of harm, id. The district court con-

cluded that they failed to do that. In re Jan. 2021 Short Squeeze Trad-

ing Litig., 2023 WL 418821, at *13–15. We think the district court

got the analysis exactly right.

Before we explain why, we first address the Investors’ at-

tempt to escape application of the economic-loss doctrine alto-

gether by pointing out that they aren’t bringing contract claims,

except in the alternative, and then for only breach of the covenants

of good faith and fair dealing. But whether the Investors have

brought contract claims makes no difference to our analysis.

“[T]he economic loss doctrine centers on whether the defendant

owed a duty to protect against the risk of harm to the plaintiff.”

Ambac I, 328 F. Supp. 3d at 159. And to avoid the economic-loss doc-

trine bar, a plaintiff must plead that a “legal duty independent of

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the contract itself has been violated.” IKB Int’l, 40 N.E. 3d at 290.

As the New York courts have explained, when a plaintiff “is essen-

tially seeking enforcement of the bargain, the action should pro-

ceed under a contract theory.” Id. (citation and quotation marks

omitted). So the mere fact that the Investors pled their breach-of-

implied-covenant claim in the alternative only does not render the

economic-loss doctrine inapplicable.

Now that we’ve established that the economic-loss doctrine

governs, we next explain why it precludes the Investors’ claims

here. Under this doctrine, the Investors must plead that Apex owed

a duty to protect them against economic losses. Ambac I, 328 F.

Supp. 3d at 159. This duty “may arise from a special relationship[.]”

Id. (quoting 532 Madison Ave., 750 N.E.2d at 1101).

The Investors assert that they are not required to plead a spe-

cial relationship to meet this burden. But they cite no authority,

and we know of no cases, in which a New York court determined

that the plaintiff overcame the economic-loss doctrine absent a spe-

cial relationship. So we conclude that the Investors must plead a

special relationship under New York law. They have not met this

requirement.

New York law recognizes the existence of a special relation-

ship under only limited circumstances. The textbook example is

the landowner and tenant relationship; that is, landowners have a

duty to protect their tenants from foreseeable harm “because the

special relationship puts them in the best position to protect against

the risk” of harm on the premises. 532 Madison Ave., 750 N.E.2d at

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1101 (citing Nallan v. Helmsley–Spear, Inc., 407 N.E.2d 451, 457–58

(N.Y. 1980)). But because there is no special relationship between

the landlord and the general public, the landlord does not owe

these duties to the general public. See 532 Madison Ave., 750 N.E.2d

at 1101–02 (citing Waters v. New York City Hous. Auth., 505 N.E.2d

922, 924 (N.Y. 1987)).

A special relationship specifically occurs when “one party

owes the other a fiduciary duty.” Valentini v. Citigroup, Inc., 837 F.

Supp. 2d 304, 329 (S.D.N.Y. 2011) (citing Stewart v. Jackson & Nash,

976 F.2d 86, 90 (2d Cir. 1992)). A “fiduciary relationship,” as New

York law defines it, “exists between two persons when one of them

is under a duty to act for or to give advice for the benefit of another

upon matters within the scope of the relation.” EBC I, Inc. v. Gold-

man, Sachs & Co., 832 N.E.2d 26, 31 (N.Y. 2005) (citations omitted).

This relationship, “necessarily fact-specific, is grounded in a higher

level of trust than normally present in the marketplace between

those involved in arm’s length business transactions.” Id. (citations

omitted). So the Investors could establish a “special relationship”

by demonstrating Apex owed them a fiduciary duty.

The Investors cannot meet this standard. Under New York

law, clearing brokers like Apex generally don’t owe individual in-

vestors any fiduciary duties. See Greenfield v. Tassinari, 779 N.Y.S.2d

531, 532 (N.Y. App. Div. 2004) (citing McDaniel v. Bear Stearns Inc.,

196 F. Supp. 2d. 343 (S.D.N.Y. 2002); Rozsa v. May Davis Grp., Inc.

(“Rozsa I”), 152 F. Supp. 2d 526 (S.D.N.Y. 2001); Schwarz v. Bear

Stearns Companies, Inc., 698 N.Y.S.2d 855 (N.Y. App. Div. 1999)).

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New York courts have affirmed this principle repeatedly for dec-

ades, Levitt v. J.P. Morgan Sec., Inc., 710 F.3d 454, 465–66 (2d Cir. 2013)

(collecting cases); Strategic Income Fund, L.L.C. v. Spear, Leeds & Kel-

lo Corp., 305 F.3d 1293, 1296 n.12 (11th Cir. 2002) (citing Connolly

v. Havens, 763 F. Supp. 6, 10 (S.D.N.Y. 1991)). 3

The existence of a contract between the Investors and

Apex—the Customer Agreement—neither undermines this princi-

ple nor creates a fiduciary relationship between the parties. Under

the Customer Agreement, the Investors are customers of both

their introducing brokers and Apex. New York caselaw repeatedly

addresses situations in which the plaintiff investors are customers

of introducing brokers. See, e.g., Rozsa v. May Davis Grp., Inc. (“Rozsa

II”), 187 F. Supp. 2d 123, 131–32 (S.D.N.Y. 2002) (collecting cases),

aff’d sub nom. Rozsa v. SG Cowen Sec. Corp., 165 F. App’x 892 (2d Cir.

2006). 4 And New York law has not held that the mere existence of

3 The Investors contend that, under New York law, the stockbroker-investor

relationship is a fiduciary relationship. True, New York sometimes recognizes

this relationship as “fiduciary in nature.” Conway v. Icahn & Co., 16 F.3d 504,

510 (2d Cir. 1994) (citing 11 N.Y. Jur. 2d Brokers § 45 (1981); People v. Mercer

Hicks Corp., 155 N.Y.S.2d 740, 744 (N.Y. Sup. Ct. 1956)). But the scope of a

fiduciary relationship—and the duties owed because of that relationship—“are

determined by the terms of the agreement between the parties.” Restatement

(Second) of Agency § 376.

4 In addition, the Investors attempt to establish a duty with reference to Rioseco

v. Gamco Asset Management, Inc., No. 15862/10, 2011 WL 4552544 (N.Y. Sup.

Ct. Sep. 23, 2011). In Rioseco, the state trial court considered a suit by investors

against their broker for negligence and for breach of fiduciary duty. Rioseco,

2011 WL 4552544. In a footnote, that court explained that cases like Rozsa

involving clearing brokers were inapplicable because the broker in Rioseco

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23-10436 Opinion of the Court 17

a contractual relationship creates a fiduciary duty. Cf. Pross v. Katz,

784 F.2d 455, 458 (2d Cir. 1986) (“Fiduciary duties are based on no-

tions of contract, but they are judicial creations rather than the

product of private bargaining.”).

True, New York law does suggest clearing brokers have “a

fiduciary duty to investors in certain extenuating circumstances.”

Rozsa I, 152 F. Supp. 2d at 531 (citing Goldman v. McMahan, Brafman,

Morgan & Co., No. 85 Civ. 2236, 1987 WL 12820, at *22 (S.D.N.Y.

June 18, 1987)). And New York courts have identified at least three

relevant situations qualifying as “extenuating circumstances” in this

context. First, when the clearing broker “asserts control over the

introducing broker’s business, or becomes actively and directly in-

volved in an introductory broker’s actions.” Glob. Enter. Grp. Hold-

ing, S.A. v. Ottimo, No. 07-CV-4904, 2010 WL 11629556, at *5

(E.D.N.Y. June 8, 2010) (citing Stern v. Legent Clearing LLC, No. 09-

CV-0794, 2009 WL 2244616, at *3 (N.D. Ill. July 28, 2009)). Second,

when the clearing broker was actively involved in a fraud scheme.

Id. (citing Goldman, 1987 WL 12820, at *22). And third, “where

there were allegations that a clearing broker undertook more than

mere clearing duties, and became aware of an investment broker’s

fraud[.]” Id. (emphasis in original) (citing A.I.A. Holdings, S.A. v. Leh-

man Bros., Inc., No. 97-CV-4978, 2002 WL 88226, at *4 (S.D.N.Y. Jan.

23, 2002)).

wasn’t a clearing broker. Id. n.22. The district court therefore correctly deter-

mined that Rioseco is inapplicable. See In re Jan. 2021 Short Squeeze Trading Litig.,

2023 WL 418821, at *16.

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18 Opinion of the Court 23-10436

But the Investors have not demonstrated any of these situa-

tions here.

As to the first possibility, the Investors have failed to show

that Apex took control over or otherwise became “actively and di-

rectly involved” in their introducing brokers’ businesses. Id. The

Investors contend that Apex “improperly directed” their introduc-

ing brokers to refuse to accept purchase orders of the suspended

stocks “for its own financial benefit and to the detriment of its cus-

tomers.”

But this behavior does not amount to “active[] and direct[]

involve[ment]” in the introducing brokers’ operation. Clearing

brokers are responsible for “receiving, maintaining[,] and delivering

customers’ securities and funds.” McDaniel, 196 F. Supp. 2d at 347.

Embedded within that responsibility is the right, which all brokers

share, to refuse to accept a customer’s orders “so long as [the bro-

ker] makes clear at the time the orders are given that he refuses to

perform them.” Courtland v. Walston & Co., 340 F. Supp. 1076, 1080

(S.D.N.Y. 1972) (citing Busch v. L. F. Rothschild & Co., 259 N.Y.S.2d

239, 240–41 (N.Y. App. Div. 1965)). New York courts haven’t recog-

nized many limits to the broker’s right to refuse to accept trades;

the breadth of this right is a foundational principle of New York

law, cf. Le Marchant v. Moore, 44 N.E. 770, 772 (N.Y. 1896). The facts

the Investors have alleged show only that Apex exercised this right.

As to the second possibility, the Investors also do not plead

facts demonstrating that Apex acted as part of a fraudulent scheme.

Instead, they contend only that involvement in a fraud scheme is

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not a requirement to showing extenuating circumstances in this

context.

But in any event, there are no allegations of a fraudulent

scheme here. And each of the cases the Investors cite for support

of their position involves clearing brokers alleged to have engaged

in broader fraudulent schemes. See McDaniel, 196 F. Supp. 2d 343,

355-356 (concluding that restricting trades was one of “nine ‘key

factual elements’ that constituted [the clearing broker’s] ‘active par-

ticipation, substantial assistance and aiding abetting’” in a fraudu-

lent scheme even while the restrictions alone were insufficient to

show such a scheme); Berwecky v. Bear Stearns & Co., 197 F.R.D. 65,

66-69 (S.D.N.Y. 2000) (granting class certification in an action by

investors against a clearing broker for a fraudulent scheme involv-

ing several actions, including restricting trades); In re Blech Sec.

Litig., 961 F. Supp. 569, 573, 576 (S.D.N.Y. 1997) (denying a motion

to dismiss a complaint alleging that a clearing broker engaged in

securities fraud under federal law and common-law fraud); Canni-

zaro v. Bache, Halsey, Stuart, Shields, Inc., 81 F.R.D. 719, 721-22

(S.D.N.Y. 1979) (denying in part a clearing broker’s motion for

summary judgment on claims they had violated federal securities

laws when investors met the requirements for alleging liability un-

der an aiding and abetting theory).

And third, because the Investors do not allege fraud, they

cannot demonstrate that Apex “undertook more than mere clear-

ing duties, and became aware of an investment broker’s fraud[.]”

Glob. Enter. Grp. Holding, S.A., 2010 WL 11629556, at *5 (emphasis

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20 Opinion of the Court 23-10436

in original) (citing A.I.A. Holdings, S.A., 2002 WL 88226, at *4). So

the Investors have not established the third scenario either. Apex’s

action here—refusing to accept purchase orders for the suspended

stocks—simply doesn’t rise to the level of involvement that the In-

vestors need to establish “extenuating circumstances.” Cf. Cromer

Fin. Ltd. v. Berger, 137 F. Supp. 2d 452, 470 (S.D.N.Y. 2001) (“A clear-

ing broker does not provide ‘substantial assistance’ to or ‘partici-

pate’ in a fraud when it merely clears trades.”).

In all, the Investors have not demonstrated that Apex as

their clearing broker owed them an additional duty to avoid the

economic loss they experienced. The economic-loss doctrine there-

fore bars their claim for negligence.

2. Even without the economic-loss doctrine, the

Investors have failed to allege that Apex owed

them a duty of care.

The Investors also assert that Apex owed them a duty of or-

dinary care under traditional agency law and under the industry

rules they claim the Customer Agreement incorporates. We ad-

dress each possible basis in turn and conclude that, even if the eco-

nomic-loss doctrine didn’t bar the Investors’ claim for negligence,

they still failed to allege a duty that New York law recognizes.

We begin, as the Investors do, with traditional agency law.

Under New York law, “[t]he relationship between a stockbroker

and its customer is that of principal and agent.” Conway, 16 F.3d at

510 (citing 11 N.Y. Jur. 2d Brokers § 45 (1981); Mercer Hicks Corp.,

155 N.Y.S.2d at 744). Like other principals, brokers owe their

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23-10436 Opinion of the Court 21

customers “a duty of reasonable care” in the “performance of

[their] obligations to customers,” like the Investors, who have non-

discretionary accounts. de Kwiatkowski v. Bear, Stearns & Co., 306

F.3d 1293, 1305 (2d Cir. 2002) (collecting cases). Based on these

broad statements by the Second Circuit, the Investors assert that

Apex owed them a duty of ordinary care.

The Investors have misread Conway and de Kwiatkowski.

Conway concerned a very narrow duty—the duty to notify a cus-

tomer and secure that customer’s consent before executing a sell-

out to meet a margin call. Conway, 16 F.3d at 507. But since Con-

way, the Second Circuit has clarified that Conway means only that

brokers owe a duty “‘to use reasonable efforts to give [their cus-

tomers] information relevant to the affairs that [have] been en-

trusted to them.’” United States v. Szur, 289 F.3d 200, 211 (2d Cir.

2002) (citing Indep. Ord. of Foresters v. Donald, Lufkin & Jenrette, Inc.,

157 F.3d 933, 941 (2d Cir. 1998); Conway, 16 F.3d at 510; 37 Am. Jur.

2d § 207 (2001)). This, of course, doesn’t help the Investors’ case.

The Second Circuit’s decision in de Kwiatkowski also con-

firms that New York imposes only limited duties on brokers.

There, the Second Circuit considered an appeal by Bear, Stearns

from a jury verdict finding it negligent for not advising a nondiscre-

tionary customer to liquidate his position. See de Kwiatkowski, 306

F.3d at 1296–301. The district court had instructed the jury that

Bear, Stearns owed the plaintiff “a duty to use the same degree of

skill and care that other brokers would reasonably use under the

same circumstances.” Id. at 1301 (internal quotation marks

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22 Opinion of the Court 23-10436

omitted) (quoting trial transcript). The Second Circuit reversed,

holding, in relevant part, that the broker’s duty is not so expansive.

See id. at 1305–14. The court explained that brokers owe only “de-

fined duties,” not “an open-ended duty of reasonable care.” Id. at

1306. So the Investors need a “defined duty” to support their claim

that Apex owed them a duty here. Id.

For two reasons, traditional agency law won’t get the Inves-

tors to a duty New York law recognizes. First, clearing brokers

don’t owe investors any duties. Rozsa II, 187 F. Supp. 2d at 131

(explaining that courts applying New York law “have determined

that clearing brokers do not owe duties to plaintiffs who are cus-

tomers of their introducing brokers”). The Investors advance a

narrower reading of New York law than we recognize, asserting

that clearing brokers don’t owe a duty only when they act as “ge-

neric clearing agent[s].” But even if we were to adopt this under-

standing, the Investors’ factual allegations establish that Apex acted

only as a “generic clearing agent” in refusing to accept their trade

orders on January 28. Courtland, 340 F. Supp. at 1080; Busch, 259

N.Y.S.2d at 240–41.

Second, brokers aren’t under a duty to accept new orders.

Although, under New York law, a broker owes certain duties to its

customers who, like the Investors, have nondiscretionary ac-

counts, those duties begin and end with each transaction. de Kwiat-

kowski, 306 F.3d at 1302; see also Schenck v. Bear, Stearns & Co., 484

F. Supp. 937, 947 (S.D.N.Y. 1979) (“The scope of affairs entrusted

to a broker is generally limited to the completion of a

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23-10436 Opinion of the Court 23

transaction.”). They do not extend to the decision to enter into a

transaction.

The Investors agree that a broker’s duties are limited to

transactions, but they urge us to adopt a more “expansive view as

to the definition of ‘transaction’” based on the district court’s ruling

on the claims that another tranche in this MDL raised. See In re Jan.

2021 Short Squeeze Trading Litig., 620 F. Supp. 3d 1231, 1249 (S.D.

Fla. 2022). But the district court interpreted the term “transaction”

broadly within the context of the Securities Exchange Act, id., and

we shouldn’t impose the contours of a federal statute onto New

York tort law.

We instead interpret “transaction” the same way that New

York courts do. A transaction begins when a broker accepts a cus-

tomer’s order and ends upon execution of that order. See Busch,

259 N.Y.S.2d at 240–41. The broker therefore has a duty to execute

the order—but only if he accepted that order. See id. Applying

these principles to the Investors’ claims, we are bound to conclude

that Apex didn’t owe the Investors a duty because Apex didn’t ac-

cept any purchase orders during the trading suspension. In short,

traditional agency law dictates that the Investors’ claim for negli-

gence must fail.

The Investors also contend that Apex owed them a duty un-

der industry rules they claim the Customer Agreement incorpo-

rates. Under the Customer Agreement, Apex has “the right to re-

fuse to execute securities transactions for the Customer at any time

and for any reason.” Despite the absence of any limitation in that

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24 Opinion of the Court 23-10436

provision of the contract, the Investors assert that we should reject

an “unconstrained reading” of Apex’s right to refuse because the

Customer Agreement makes all transactions “subject to the consti-

tution, rules, regulations, customs and usages of the exchange or

market and its clearing house.” Because Apex is a member of

FINRA, the NYSE, and the NASDAQ, the Investors argue that

Apex must “observe high standards of commercial honor and just

and equitable principles of trade when dealing with [its] custom-

ers.” They direct our attention to one rule in particular—FINRA

Regulatory Notice 21-12, a notice issued after the meme stock

frenzy of January 2021, which states that “the foundation of the se-

curities industry is fair dealing with customers . . . even during

times of market stress.” And they claim that New York holds bro-

kers liable for failure to abide by these industry rules.

But FINRA and other industry regulations don’t impose an

independent duty on brokers because they aren’t private causes of

action. Fox v. Lifemark Sec. Corp., 84 F. Supp. 3d 239, 245 (W.D.N.Y.

2015) (citing Richman v. Goldman Sachs Group, Inc., 868 F. Supp. 2d

261, 274 (S.D.N.Y. 2012)) (concluding that “plaintiff[s] cannot re-

cover for negligence based on the alleged violation of FINRA

[rules].”)

In short, New York law clearly establishes that clearing bro-

kers generally don’t owe investors any duties. Neither traditional

agency law nor industry rules support the Investors’ claims.

B. The Investors failed to allege a fiduciary duty to state a claim

for breach of fiduciary duty.

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23-10436 Opinion of the Court 25

The Investors next appeal the district court’s dismissal of

their claim for breach of fiduciary duty. We believe the district

court correctly concluded the Investors have failed to state this

claim. In re Jan. 2021 Short Squeeze Trading Litig., 2023 WL 418821,

at *17.

To recover for breach of fiduciary duty, the Investors needed

to plead “(1) the existence of a fiduciary relationship, (2) miscon-

duct by the defendant, and (3) damages directly caused by the de-

fendant’s misconduct.” Baldeo v. Majeed, 55 N.Y.S.3d 340, 344 (N.Y.

App. Div. 2017) (citing Deblinger v. Sani–Pine Prods. Co., Inc., 967

N.Y.S.2d 394, 396 (N.Y. App. Div. 2013); Rut v. Young Adult Inst., Inc.,

901 N.Y.S.2d 715, 717 (N.Y. App. Div. 2010)). Under New York law,

a fiduciary relationship exists between two parties when one party

“is under a duty to act for . . . the benefit of another upon matters

within the scope of the relation.” EBC I, Inc., 832 N.E.2d at 31 (in-

ternal quotation marks omitted) (quoting Restatement (Second) of

Torts § 874 cmt. a). So to state a claim for breach of fiduciary duty,

the Investors must show that Apex owed them a fiduciary duty.

As we explained in our discussion of the economic-loss doc-

trine, Plaintiffs haven’t alleged that Apex owed them a fiduciary

duty. Clearing brokers generally don’t owe a fiduciary duty to in-

vestors. See Greenfield, 779 NY.S.2d at 532. And Plaintiffs haven’t

established any extenuating circumstances to overcome this gen-

eral rule. See Glob. Enter. Grp. Holding, S.A., No. 07-CV-4904, 2010

WL 11629556, at *5. They therefore cannot succeed on a claim for

breach of fiduciary duty.

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26 Opinion of the Court 23-10436

C. New York law precludes the Investors’ claim that Apex

breached the implied covenant of good faith and fair dealing.

Third, we have the Investors’ alternative claim that Apex

breached the covenant of good faith and fair dealing by “restricting

one-sided trading (purchases) on January 28, 2021” for the purpose

“of causing the trading price of the suspended stocks to go down.”

The district court dismissed this claim, explaining that the Investors

may not use this implied covenant to undercut the express terms

of the Customer Agreement. In re Jan. 2021 Short Squeeze Trading

Litig., 2023 WL 418821, at *18. We agree with this conclusion.

All contracts governed by New York law, including the Cus-

tomer Agreement between the parties here, contain an implied

covenant of good faith and fair dealing in the course of perfor-

mance. Singh v. City of New York, 217 N.E.3d 1, 5 (N.Y. 2023) (citing

511 W. 232nd Owners Corp. v. Jennifer Realty Co., 773 N.E.2d 496 (N.Y.

2002); Kirke La Shelle Co. v. Paul Armstrong Co., 188 N.E. 163 (N.Y.

1933)). This covenant is “‘a pledge that neither party shall do any-

thing which will have the effect of destroying or injuring the right

of the other party to receive the fruits of the contract.’” Id. (quot-

ing Jennifer Realty Co., 773 N.E.2d at 500). But this covenant extends

to the parties’ reasonable expectations only. Bank of China v. Chan,

937 F.2d 780, 789 (2d Cir. 1991) (citing Havel v. Kelsey–Hayes Co., 445

N.Y.S.2d 333, 336 (N.Y. App. Div. 1981)). It cannot be used “‘to re-

make the contract agreed to by the parties,’” Cordero v. Transamerica

Annuity Serv. Corp., 211 N.E.3d 663, 670 (N.Y. 2023) (quoting Rowe

v. Great Atl. & Pac. Tea Co., 385 N.E.2d 566, 570 (N.Y. 1978)), or “nul-

lify express contractual terms,” Bersin Props., LLC v. Nomura Credit

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23-10436 Opinion of the Court 27

& Cap., Inc., 183 N.Y.S.3d 376, 378 (N.Y. App. Div. 2023) (citing Nat’l

Union Fire Ins. Co. of Pittsburgh, Pa. v. Xerox Corp., 807 N.Y.S.2d 344

(N.Y. App. Div. 2006)).

Here, the Customer Agreement gave Apex the “right to re-

fuse to execute securities transactions for [the Investors] at any time

and for any reason.” Still, the Investors contend that Apex could

exercise this right to refuse orders only “on a limited basis” because

they reasonably expected that Apex couldn’t act in a way that might

depress stock prices and undermine their “ability to reap the fruits

of the contract.” And according to the Investors, we must read the

implied covenant to cabin Apex’s discretion because New York tort

law and FINRA rules prevent Apex “from contracting itself out of

liability.”

This interpretation of the implied duty of good faith and fair

dealing directly contradicts the plain language of the Customer

Agreement. The Customer Agreement doesn’t impose any re-

strictions on Apex’s right to refuse to accept trading orders; in fact,

it clearly states that Apex can exercise this right “at any time and

for any reason.” New York law forbids us from implying a duty

that is “inconsistent with other terms of the contractual relation-

ship.” Murphy v. Am. Home Prods. Corp., 448 N.E.2d 86, 91 (N.Y.

1983).

New York courts have considered and rejected similar claims

to those of the Investors for decades. For instance, in Murphy, the

New York Court of Appeals considered whether the implied cove-

nant of good faith and fair dealing limits an employer’s “unfettered

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28 Opinion of the Court 23-10436

right” to terminate an employment at will at any time. Id. The

court ultimately determined that the implied covenant doesn’t re-

strict the employer’s right of termination because “it would be in-

congruous to say that” the employer “impliedly agreed to a provi-

sion which would be destructive of his right” to terminate employ-

ees at any time. Id.

The New York Court of Appeals reaffirmed this principle

just last year in response to a question of law that this Court certi-

fied. Cordero, 211 N.E.3d at 665. We asked the New York court to

clarify whether the implied covenant of good faith and fair dealing

imposes a duty on defendants to enforce the anti-assignment pro-

visions in structured settlement agreements and refrain from tak-

ing certain actions. Id. The New York Court of Appeals deter-

mined that the implied covenant can’t create a new fiduciary duty

that is stricter than the express terms of the contract. Id. at 671.

The same principle applies here. The Customer Agreement

gave Apex an “unfettered right” to refuse trading orders “at any

time and for any reason.” The duty that the Investors argue we

must imply would impose an additional and unwritten obligation

that would prevent Apex from exercising its express right under the

contract. Because the implied covenant would be inconsistent with

the express terms of the contract, we must reject the Investors’

claim.

D. The Investors failed to state a claim for tortious interference.

Lastly, the Investors contend that they have adequately pled

that Apex tortiously interfered with their business relationship with

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23-10436 Opinion of the Court 29

their introducing brokers. To state a claim for tortious interference

under New York law, the Investors need to show (1) that they had

a business relationship with the introducing brokers; (2) that Apex

knew about and intentionally interfered with that relationship; (3)

that Apex’s “actions were motivated solely by malice or otherwise

constituted illegal means”; and (4) that Apex’s interference injured

the business relationship. 684 E. 222nd Realty Co., LLC v. Sheehan,

128 N.Y.S.3d 273, 275 (N.Y. App. Div. 2020) (citing Tri–Star Light.

Corp. v. Goldstein, 58 N.Y.S.3d 448, 453 (N.Y. App. Div. 2017); Ama-

ranth LLC v. J.P. Morgan Chase & Co., 71 A.D.3d 40, 47, 888 N.Y.S.2d

489, 494 (N.Y. App. Div. 2009)). We agree with the district court

that the Investors failed to establish that Apex acted solely out of

malice or otherwise acted unlawfully. In re Jan. 2021 Short Squeeze

Trading Litig., 2023 WL 418821, at *19.

The Investors raise two arguments on appeal. First, they ar-

gue that Apex acted unlawfully because it committed two separate

and independent torts—negligence and breach of fiduciary duty.

This argument isn’t convincing; as we’ve explained, the Investors

have failed to state a claim for either tort. So neither tort helps the

Investors establish the third element of their claim for tortious in-

terference.

But even if the Investors had stated a claim for negligence or

for breach of fiduciary duty, New York does not appear to recog-

nize either tort as constituting “illegal means” for purposes of a

claim for tortious interference. See Carvel Corp. v. Noonan, 818

N.E.2d 1100, 1104 (N.Y. 2004). New York law appears to recognize

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30 Opinion of the Court 23-10436

only the following as “illegal means” in this context: “physical vio-

lence, fraud or misrepresentation, civil suits and criminal prosecu-

tions, and some degrees of economic pressure.” Id. (quoting

Guard–Life Corp. v. S. Parker Hardware Mfg. Corp., 406 N.E.2d 445,

449 (N.Y. 1980)).

Second, the Investors contend that Apex employed illegal

means because the trading restriction was a form of economic

pressure. We are not persuaded. For economic pressure to be

wrongful under New York law, it must be “extreme and unfair.”

Carvel Corp., 818 N.E.2d at 1105. Conduct that “the express words

of the contracts” permit can’t constitute wrongful economic pres-

sure. Id. So because the Customer Agreement expressly allowed

Apex to refuse trading orders “at any time and for any reason,”

Apex didn’t engage in wrongful conduct by refusing the Investors’

purchase orders.

In sum, the Investors didn’t allege that Apex acted out of

malice and failed to adequately allege that Apex committed some

other unlawful act. The district court therefore correctly dismissed

their claim for tortious interference.

IV. Conclusion

The Investors took a gamble on the meme stocks in January

2021. That gamble didn’t pay off in precisely the ways they’d

hoped. Although they may disagree with how Apex handled the

volatility of the market on January 28, they have failed to show that

Apex is liable for its actions under New York law. So for the

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foregoing reasons, we affirm the district court’s order dismissing

Plaintiffs’ complaint for failure to state a claim under Rule 12(b)(6).

AFFIRMED.