Interactive Brokers secures dismissal of complaint about portfolio margin investment accounts

Maria Nikolova

The Court says the complaint brought by two Interactive Brokers’ clients fails to state a claim.

Electronic trading major Interactive Brokers LLC has managed to dismiss a complaint brought by two of its clients – Heather Hauptman and Timothy Moss.

On Tuesday, June 12, 2018, Judge George B Daniels signed a Memorandum Decision and Order directing the dismissal of the plaintiffs’ complaint for failure to state a claim.

Let’s recall that the plaintiffs – Heather Hauptman and Timothy Moss, are investors who have brought this putative class action against their former broker-dealer, Interactive Brokers, LLC, alleging that the defendant breached its contractual obligations by including certain exchange traded notes (ETNs) in their portfolio margin investment accounts. The defendant has moved to dismiss the complaint for lack of subject matter jurisdiction and, in the alternative, for failure to state a claim.

At the center of the dispute is FINRA Rule 4210, which 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.

From in or around April 2014 until January 2016, Interactive Brokers published a notice on its website stating that ETNs are not eligible for portfolio margin treatment and that the company would not provide portfolio margin for ETNs. The plaintiffs allege that, notwithstanding the statement on the broker’s website, from 2011 through the present, the company calculated margin requirements for ETNs using the portfolio margin requirements, rather than traditional margin requirements. The plaintiffs allege that calculating margin requirements for ETNs using portfolio margin treatment breached Interactive Brokers’ obligations under the Customer Agreement, the Portfolio Margin Disclosure, and the FINRA regulations that the defendant is contractually obligated to follow.

In its Memorandum Decision and Order, Judge George B Daniels explains that the plaintiffs’ breach of contract claims fail because the language identified by the plaintiffs does not impose any contractual obligations on Interactive Brokers.

According to the Judge, the plaintiffs’ claim for breach of the Customer Agreement is premised upon provisions stating that all transactions are subject to rules and policies of relevant markets and clearinghouses, and applicable laws and regulations and that “margin transactions are subject to margin requirements of exchanges, clearinghouses and regulators and also to any additional margin requirement of the broker, which may be greater.” But such language only serves to inform the customers that their trades are constrained by the rules of governing regulatory agencies and does not impose any obligations on Interactive Brokers.

The Judge notes the plaintiffs’ allegations that the language in the Customer Agreement “incorporates and includes FINRA Rule 4210.” But the Customer Agreement does not expressly refer to Rule 4210, he adds.

The plaintiffs’ second claim for breach of contract is based on their acknowledgement of the Portfolio Margin Disclosure. While the Portfolio Margin Disclosure mentions Rule 4210, such an acknowledgment that plaintiffs’ trades are subject to applicable rules and regulations does not incorporate the rules by reference and does not impose any contractual obligations on the defendant. Because neither the provisions of the Customer Agreement identified by the plaintiffs nor the Portfolio Margin Disclosure imposed contractual obligations on Interactive Brokers, the plaintiffs’ breach of contract claims fail.

As a result, the plaintiffs’ claims for breach of the implied covenant of good faith and fair dealing, promissory estoppel, unjust enrichment, and negligence also fail because they are duplicative of their breach of contract claims.

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