Wells Fargo Securities LLC defeated an appeal Monday by investors seeking to revive their lawsuit blaming the financial services firm for at least $500 million in loses from a 2018 portfolio liquidation.
The investors said Wells Fargo caused those losses when, acting as a futures commission merchant to LJM Investment Fund LP and LJM Partners Ltd., it forced the funds to liquidate their entire portfolio in response to temporary market volatility.
But those allegations don’t support proposed class claims for negligence, interference with a contract or business relations, or aiding a fiduciary breach by LJM, the US Court of Appeals for the Second Circuit said. The ruling affirmed a dismissal by the US District Court for the Southern District of New York.
Investors Todd and Joseph Kafka didn’t show the sort of duties and wrongful actions needed for their claims, the Second Circuit said in an unpublished, unsigned opinion.
The three-judge panel ruling follows a pair of Illinois federal court decisions earlier this month denying efforts by the US Securities and Exchange Commission and Commodity Futures Trading Commission to obtain summary judgment rulings in lawsuits alleging LJM and its managers lied to investors about the worst-case scenario for their trading strategy and about their maintenance of consistent risk levels.
Estimated investment losses in those cases, stemming from the same events at issue in Kafkas’ case, total more than $1 billion. LJM principal Anthony Caine said he personally lost more than $100 million.
Underlying Allegations
The market suffered a steep decline on Feb. 5, 2018, the Kafkas said in their 2022 class action complaint, but the LJM portfolio had successfully countered market volatility with risk management protocols in the past. When the
LJM had completely unwound the portfolio by the end of that day pursuant to Wells Fargo’s instructions, resulting in losses between $500 million and $800 million to the Kafkas and potential class members, according to their filing.
US District Judge Laura Taylor Swain dismissed the Kafkas’ suit in its entirety, ruling that Wells Fargo didn’t owe a duty of care to investors, but to its customer, LJM, for which it provided clearing and execution services. She also found that the investment firm was entitled to act in its own economic interest when liquidating the portfolios, and that plaintiffs didn’t show Wells Fargo intentionally induced LJM’s breaches of contract to investors.
The Kafkas, investors in an LJM options-oriented mutual fund and various LJM commodity pools, had no contract with Wells Fargo directly, which undermined several other allegations that the clearing broker breached its contractual or fiduciary duties, Swain said in her 2023 ruling.
The Kafkas appealed.
Appellate Affirmation
For a negligence claim, a plaintiff must show the defendant owed the plaintiff a duty, but the Kafkas didn’t adequately allege “that Wells Fargo owed them, or any putative class members, any duty,” the appeals court said.
“If Wells Fargo had a duty to avoid financial harm to all downstream investors in its conduct, the scope of potential liability would be enormous and would severely restrict Wells Fargo’s ability to protect its own financial wellbeing,” the three-judge panel said. “The law would not impose such an immense burden.”
The Kafkas didn’t claim that Wells Fargo desired that LJM breach its contract with them, the panel said. That sinks their claim for tortious, or wrongful, interference with contract—and their claim for tortious interference with business relations merely duplicates their contract interference claim, it said.
Wells Fargo isn’t on the hook for aiding and abetting a breach of fiduciary duty by LJM because the investors didn’t allege such a breach, the court said.
And the investors’ contract-based claims fail because the provisions in the agreements between LJM and Wells Fargo “leave no doubt that the parties intended to preclude any benefit from flowing to a third party,” the judges said.
Judges Guido Calabresi and William J. Nardini, along with Judge Paul A. Engelmayer of the Southern District of New York, who sat by designation, served on the panel.
Wolf Haldenstein Adler Freeman & Herz LLP represented the investors. Mayer Brown LLP and Shook, Hardy & Bacon, LLP represented Wells Fargo.
The case is Kafka v. Wells Fargo Sec., LLC, 2d Cir., No. 23-01281, unpublished 10/21/24.
Source: news.bloomberglaw.com
