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California Court Confirms That Brokerage Firms Have No Duty to Protect Investors in Self-Directed Accounts from their Own Investment Decisions

In Holland v. TD Ameritrade, Inc., 2012 WL 592042 (E.D. Cal. Feb. 22, 2012), the Eastern District of California granted TD Ameritrade’s motion to dismiss based, in large part, on its finding that the brokerage firm did not have a duty to protect the plaintiff from losses stemming from investments he had made in his self-directed brokerage account.

Plaintiff had alleged that TD Ameritrade knew of and deliberately hid certain risks related to his use of TD Ameritrade’s internet trading program. Among those risks, plaintiff claimed that TD Ameritrade knew of the “inherent statistical risk” of the stock market but failed to discharge its obligation to advise plaintiff of those risks or intervene in his trading to stop his losses. Plaintiff also had alleged that TD Ameritrade engaged in a scheme to encourage his frequent trading, exacerbating the risk of harm.

In dismissing plaintiff’s complaint, the court denounced plaintiff’s fraud claim as essentially creating a non-existent “duty [upon defendant] to protect [the plaintiff] from losses in trading securities, somehow guaranteeing plaintiff would not lose money.” In rejecting plaintiff’s argument, the court referenced plaintiff’s contract with TD Ameritrade, which the court found had disclosed the inherent risks of investing. The court also found that the TD Ameritrade Service contract did not require any “higher level of service” than TD Ameritrade had provided, and that plaintiff could not rely on his own failure to read and understand the contract he had signed to escape the explicit disclosures contained therein.

Similarly, the court rejected plaintiff’s Consumers Legal Remedies Act (CLRA) claims. Plaintiff had alleged that TD Ameritrade’s brokerages services were inherently harmful and that they failed to contain sufficient consumer protections. In dismissing the CLRA claim, the court questioned whether TD Ameritrade’s brokerage services qualified under the CLRA, but, even assuming they did, the court explained that TD Ameritrade had no duty to protect plaintiff from any self-directed investment. Moreover, the court highlighted that plaintiff failed to identify any authority requiring TD Ameritrade to protect an investor in a self-directed account from any loss stemming from his or her own investment decisions.

Although Holland does not represent earth-shattering legal precedent, in the wake of all the political, regulatory and societal pressure for unfettered heightening of brokerage firm duties and obligations, Holland is a refreshing reminder that common sense still has a place in California jurisprudence. Firms looking to take advantage of Holland’s good reasoning would be well-advised to review their customer agreement documents to determine if those agreements include language similar to that which the court held against the investor in this case. 

©2021 Greenberg Traurig, LLP. All rights reserved. National Law Review, Volume II, Number 119
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Greenberg Traurig's Securities Litigation Practice is one of the largest in the United States. We have been lead defense counsel in hundreds of securities class actions, derivative actions, and investigations and enforcement actions by the SEC, FINRA, and state regulators, including some of the largest, most complex, and highly publicized regulatory actions and securities fraud cases filed in recent times. We have also defended the largest broker-dealers on Wall Street in high stakes customer and industry arbitrations; our broker-dealer lawyers have collectively tried to...

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