Clients of Interactive Brokers amend complaint about improper account administration

Maria Nikolova

A month after the Court dismissed the complaint against the broker by ruling that its clients had failed to state a claim, the plaintiffs seek to revive the action by filing an amended complaint.

One month after Judge George B Daniels of the New York Southern District Court dismissed a complaint by clients of electronic trading major Interactive Brokers LLC saying that the complaint failed to state a claim, the plaintiffs in the case – Heather Hauptman and Timothy Moss, are seeking to revive the action by amending their complaint.

On Thursday, July 12, 2018, the plaintiffs filed a number of documents with the Court, including a proposed amended complaint.

Let’s recall that Interactive Brokers’ clients brought a putative class action against their former broker-dealer, alleging that the defendant breached its contractual obligations by including certain exchange traded notes (ETNs) in their portfolio margin investment accounts. The defendant then moved to dismiss the complaint for lack of subject matter jurisdiction and, in the alternative, for failure to state a claim, with the Court eventually siding with the broker.

Plaintiffs’ original legal theories were grounded in their position that the operative contracts prohibited Interactive Brokers from trading ETNs in their portfolio margin accounts because Financial Industry Regulatory Authority (FINRA) Rule 4210(g) prohibited the conduct.

FINRA Rule 4210 governs margin trading. The rule contains a list of products eligible for portfolio margin treatment, including margin equity securities. According to the plaintiffs, ETNs are not eligible for portfolio margin treatment because they are debt instruments, not equity securities, and do not fall within any other category of financial products listed in Rule 4210.

But the Court disagreed with the broker’s clients. The crux of the Court’s reasoning was that the governing contracts only demonstrated that the clients had notice of Interactive Brokers’ obligation to comply with pertinent laws and regulations, and that the clients could not circumvent the inability to proceed with a private cause of action for violations of FINRA Rule 4210(g) “by styling their claim as a breach of contract.”

In the amended complaint, the plaintiffs’ breach of contract claims rest upon a different theory. Now the broker’s clients alleged that additional promises and commitments by Interactive Brokers were made in 2014 and that these “exceed those imposed by FINRA.” The plaintiffs now specifically allege that the parties’ Disclosure Statement was supplemented and amended by the 2014 Agreements that specifically promised and agreed that Interactive Brokers would not include ETNs in its portfolio margin accounts, and thereby Interactive Brokers subsequently breached its agreements when it did so, resulting in substantial losses for the plaintiffs and other putative class members.

Accordingly, the plaintiffs argue that the 2014 Agreements form the basis of additional obligations agreed to by Interactive Brokers (regardless of FINRA Rules) and are sufficient to stand as claims for breach of express and/or implied contracts.

The case is captioned Hauptman et al v. Interactive Brokers, LLC (1:17-cv-09382).

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