at pages 2 - 3 of the NDCA OrderThe plaintiff alleges that Schwab's online platform for buying and selling stocks malfunctioned. On April 20, 2020, he tried to close a short position on 6,300 shares of Royal Caribbean stock. Schwab bought the replacement 6,300 shares to close the short position, but it did not close the short position. The plaintiff tried several times (by clicking the "close" link) to close the short position, but each click resulted only in duplicate orders for the purchase of the replacement 6,300 shares and did not close the short position. In total, the plaintiff clicked the close link five times over a 10-minute period, resulting in the purchase of 31,500 shares, purchased long on margin (on loaned funds totaling $1.1 million and carrying interest charges)."Upon realizing that Schwab's system placed him into a $1.1 million long position in Royal Caribbean, Plaintiff informed Schwab that Schwab's system had malfunctioned and that trades were executed inconsistent with his instructions. Schwab did not correct its errors and left . . . [the] short and long positions open, thereby failing to timely execute a securities trade as instructed." "Given the risk of significant financial loss from a $1.1 million margin loan," the plaintiff "attempted to mitigate the damages . . . [from] the system malfunction" and sold the shares after hours at a loss that exceeded $10,000. In addition, Schwab removed the plaintiff's margin buying power for 90 days.The system malfunctioned again on April 22, 2020, when the plaintiff tried unsuccessfully to close a new short position in Royal Caribbean stock, again by clicking the close link. The plaintiff "immediately" contacted Schwab. Schwab's representative said that the system was "getting confused and changing the type" of transaction, which meant that a transaction bought replacement shares but did not close the short position. The representative said that "Schwab was aware of the problem and had been working for several months to correct it." A week later, a "Resolution Manager" from Schwab's Client Advocacy Team told the plaintiff that "due its ongoing system malfunction, Schwab failed to execute Plaintiff's trades as Plaintiff instructed." "Schwab has not fully compensated Plaintiff for his losses."
SIDE BAR: Note "operational capacity" and trading-platform issues set forth in: "A History Of SOES, Daytrading, NASD, NASDAQ, DOJ, SEC, Congress, And Robinhood -- And A Massachusetts Complaint And Another FINRA Fine" (BrokeAndBroker.com Blog / December 17, 2020) http://www.brokeandbroker.com/5595/robinhood-daytrading-massachusetts/
First, after a customer completes an application, Schwab opens an account and acts as the customer's broker to purchase and sell securities for the account "and on [the customer's] instructions."Second, the agreement defines Schwab's liability for its failure to complete transactions:
If we do not complete a transaction to or from your Account on time or in the correct amount according to our agreement with you, we may be liable for your losses or damages. However, in no event shall Schwab be liable for any special, indirect or consequential damages, even if we have been informed of the possibility of such damages.
There are some exceptions. (There may be other exceptions not specifically mentioned here.) We will not be liable, for instance, if:. . .
- Circumstances beyond our control (such as fire or flood) prevent the transfer, despite reasonable precautions that we have taken.
. . .
- An error in posting an amount or transaction occurs that is beyond our control.
Another section called "Limitations of Liability" also provides that Schwab has no liability for events outside of its direct control.
Schwab, the Information Providers, Information Transmitters, Third-Party Research Providers and any other person involved in transmitting Information will not be liable for any loss that results from a cause over which that entity does not have direct control. Such causes include, but are not limited to: (1) the failure of electronic or mechanical equipment or communication lines: (2) telephone or other interconnect problems; [and] (3) bugs, errors, configuration problems or the incompatibility of computer hardware or software. . . ."
Third, the agreement has two separate (and virtually identical) paragraphs about procedures for order changes or cancellation requests.
Another section has this provision requiring customers to notify Schwab of transaction errors:
You acknowledge that it may not be possible to cancel a market or limit order once you have placed it, and you agree to exercise caution before placing all orders. Any attempt you make to cancel an order is simply a "request to cancel." Schwab processes your request to change or cancel an order on a best-efforts basis only and will not be liable to you if Schwab is unable to change or cancel your order. . . . No change or cancellation of market orders will be accepted through the Electronic Services. . . . If you wish to try to change or cancel your market order, you agree to call a Schwab representative to assist you. Attempting to replace or change a market order through the Electronic Services can result in the execution of duplicate orders, which ultimately are your responsibility. If an order cannot be canceled or changed, you agree that you are bound by the results of the original order you placed.
You also agree to notify us immediately if you:. . .
- Fail to receive a message that an order you initiated through the services has been received or executed.
Fourth, the agreement has a section titled "Risks of Electronic Trading," which states in part:
- Fail to receive an accurate written confirmation of an order or its execution.
- Receive confirmation of an order that you did not place.
at pages 4 - 5 of the NDCA OrderWhen you use the Electronic Services to place a trade order, you acknowledge that your order may not be reviewed by a registered representative before being routed to an exchange for execution and you also will not have the opportunity to ask questions or otherwise interact with a Schwab representative. By placing a trade order through the Electronic Services, you voluntarily agree to assume any added risk that may result from the lack of human review of [the] order in exchange for the reduced commission and potentially greater convenience of electronic trading.
at Page 7 of the NDCA Order[(1)] it is not liable under the brokerage agreement for system bugs and technical errors, the plaintiff breached the agreement by not notifying Schwab, and there is no standalone claim for breach of the implied covenant of good faith and fair dealing, and (2) there is no unlawful act or unfair practice.20 The court denies the motion to dismiss the contract claim and grants the motion to dismiss the implied-covenant and UCL claims.
(1) a contract existed; (2) the plaintiff performed his duties or was excused from performing his duties under the contract; (3) the defendant breached the contract; and (4) the plaintiff suffered damages as a result of that breach.
at Pages 8 - 9 of the NDCA OrderThe disclaimer here bars Schwab's liability for technical errors that are outside its direct control. The plaintiff does not contest that he is bound by the disclaimer and instead contends that the provision does not apply because Schwab had control over the technical errors. This involves a fact issue that the court cannot address at the pleadings stage. It is Schwab's trading platform, after all, and the plaintiff plausibly pleaded Schwab's knowledge of an ongoing problem and its inability to remedy it.Second, Schwab contends that the losses here happened because the plaintiff kept reentering duplicative orders and did not - as required by the brokerage agreement - "call a Schwab representative to assist" him. Moreover, it asserts, the online platform enabled trading without Schwab agents, but it came with identified risks: no review by agents and the potential that changing orders online - in violation of the requirement to call an agent for assistance - could result in duplicate orders.
[(1)] the UCL does not apply to securities transactions; (2) a breach-of-contract clam cannot be a predicate for a UCL unlawful claim; and (3) the plaintiff did not plausibly plead an unfair practice. . . .