Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_09-cv-01229/USCOURTS-azd-2_09-cv-01229-2/pdf.json

Nature of Suit Code: 370
Nature of Suit: Other Fraud
Cause of Action: 28:1441 Petition for Removal- Fraud

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Plaintiffs’ memoranda do not comply with Local Rule of Civil Procedure 7.1(b)(1)’s

requirement that all papers be in 13 point type, including footnotes. Plaintiffs’ counsel

should comply with this rule in all future filings in this Court.

WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Barry L. Stern, M.D. and Judy Stern,

husband and wife; and Barry L. Stern as

trustee for the Urology Clinic Ltd Profit

Sharing Plan, dated April 8, 1991,

Plaintiffs, 

vs.

Charles Schwab & Co., Inc., a foreign

corporation; Wells Fargo Bank, N.A., a

foreign corporation,

Defendants. 

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No. CV-09-1229-PHX-DGC 

ORDER

Plaintiffs Barry and Judy Stern and the Urology Clinic Ltd Profit Sharing Plan have

sued Defendants Charles Schwab & Co., Inc. and Wells Fargo Bank, N.A. for negligence and

aiding and abetting various torts. Defendant Schwab has filed a motion for judgment on the

pleadings of Plaintiffs’ second amended complaint. Dkt. #33. Defendant Wells Fargo has

filed a motion to dismiss the second amended complaint for failure to state a claim. Dkt. #47.

Both motions are fully briefed. Dkt. ##46, 52, 53, 54. The Court held oral argument on

March 17, 2010. For reasons that follow, the Court will grant both motions.1

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I. Background.

Between April and August of 2007, the Sterns invested almost two million dollars

with Deborah Cheryl Bennett, a woman, they allege, who was unemployed, not a registered

securities dealer, and had no significant investment experience. Dkt. #39 at ¶ 98. The Sterns

wrote personal checks totaling $1,915,000 to Mrs. Bennett because she promised them

returns of 20 to 30% per month – 240 to 360% per year – by trading in the stock market. Id.

at ¶ 18. The Sterns lost all but $105,000 of their money. Dkt. #39-3 at 6.

The Sterns do not sue Mrs. Bennett in this case. Not surprisingly, she is in bankruptcy

and under investigation by various state and federal authorities. Dkt. #39 at ¶¶ 38-40, 120.

Rather, the Sterns sue Wells Fargo, the bank where Mrs. Bennett maintained the account

through which most of the money passed, and Schwab, the investment firm Mrs. Bennett

used to make her stock market trades. The Sterns allege that Wells Fargo and Schwab were

negligent in failing to stop Mrs. Bennett’s fraud and aided and abetted her various torts. This

case presents the question of whether a bank and an investment firm, under Arizona law,

have a duty to protect third parties from fraud committed by the bank’s and investment firm’s

customer, and whether Defendants had sufficient knowledge of Mrs. Bennett’s fraud to give

rise to liability for aiding and abetting.

The Court has confronted these issues before. The Court previously dismissed the

allegations against Wells Fargo for failure to state a claim. See Stern v. Charles Schwab &

Co., CV-09-1229-PHX-DGC, 2009 WL 3352408 (D. Ariz. Oct. 16, 2009). The Sterns filed

a second amended complaint, which Defendants now ask the Court to dismiss or adjudge on

the pleadings.

II. Legal Standard.

A. Failure to State a Claim. 

When analyzing a complaint for failure to state a claim under Rule 12(b)(6), “[a]ll

allegations of material fact are taken as true and construed in the light most favorable to the

non-moving party.” Smith v. Jackson, 84 F.3d 1213, 1217 (9th Cir. 1996). “To avoid a

Rule 12(b)(6) dismissal, a complaint need not contain detailed factual allegations; rather, it

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must plead ‘enough facts to state a claim to relief that is plausible on its face.’” Clemens v.

DaimlerChrysler Corp., 534 F.3d 1017, 1022 (9th Cir. 2008) (quoting Bell Atl. Corp. v.

Twombly, 550 U.S. 544, 570 (2007)). “The plausibility standard . . . asks for more than a

sheer possibility that a defendant has acted unlawfully,” demanding instead sufficient factual

allegations to allow “the court to draw the reasonable inference that the defendant is liable

for the misconduct alleged.” Ashcroft v. Iqbal, --- U.S. ---, 129 S. Ct. 1937, 1949 (2009)

(citing Twombly, 550 U.S. at 556). “[W]here the well-pleaded facts do not permit the court

to infer more than the mere possibility of misconduct, the complaint has alleged – but it has

not ‘show[n]’ – ‘that the pleader is entitled to relief.’” Id. at 1950 (citing Fed. R. Civ. P.

8(a)(2)).

The Court may not assume that a plaintiff can prove facts different from those alleged

in the complaint. See Associated Gen. Contractors of Cal. v. Cal. State Council of

Carpenters, 459 U.S. 519, 526 (1983); Jack Russell Terrier Network of N. Cal. v. Am. Kennel

Club, Inc., 407 F.3d 1027, 1035 (9th Cir. 2005). Similarly, legal conclusions couched as

factual allegations are not given a presumption of truthfulness, and “conclusory allegations

of law and unwarranted inferences are not sufficient to defeat a motion to dismiss.” Pareto

v. F.D.I.C., 139 F.3d 696, 699 (9th Cir. 1998); see also Iqbal, 129 S. Ct. at 1949

(“Threadbare recitals of the elements of a cause of action, supported by mere conclusory

statements, do not suffice.”) (citation omitted). 

B. Judgment on the Pleadings.

A motion for judgment on the pleadings under Rule 12(c) is decided under the same

standards as a Rule 12(b)(6) motion. McGlinchy v. Shell Chem. Co., 845 F.2d 802, 810 (9th

Cir. 1988).

III. Negligence.

Wells Fargo and Schwab ask the Court to dismiss the negligence claims on the ground

that neither of them owed a duty to the Sterns. The tort of negligence requires that the

defendant owed the plaintiff a duty. Gipson v. Kasey, 150 P.3d 228, 230 (Ariz. 2007).

Whether a duty exists is decided by the Court as a matter of law. Id. 

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A. Wells Fargo.

The Sterns contend that Wells Fargo owed them a duty for three reasons: (1) the

Sterns were customers of Wells Fargo, (2) Wells Fargo had actual knowledge of Mrs.

Bennett’s fraud, and (3) public policy supports a duty. Dkt. #53 at 3-13. The Court finds

none of these arguments persuasive.

1. Customer Relationship.

The Sterns contend that they too were customers of Wells Fargo at the time of Mrs.

Bennett’s fraud and, because of that relationship, Wells Fargo owed them a duty to “disclose

the irregular, illegal and fraudulent activity” in Mrs. Bennett’s account or to “approve,

supervise, and control” Mrs. Bennett’s account. Dkt. #39 at ¶¶ 182, 184. Significantly, the

Sterns do not allege that their accounts were the same as Mrs. Bennett’s account, that their

accounts and Mrs. Bennett’s account were opened in connection with each other, or that

Wells Fargo understood the accounts to be connected. Rather, they simply allege that they

banked at Wells Fargo at the same time that Mrs. Bennett used her separate Wells Fargo

account to perpetrate the fraud. Id. at ¶¶ 11-15.

Under Arizona case law, the relationship between a bank and an ordinary customer

is no more than that of debtor and creditor. The relationship does not give rise to a fiduciary

duty. McAlister v. Citibank (Arizona), 829 P.2d 1253, 1258 (Ariz. App. 1992). Taking the

facts in the light most favorable to the Sterns, nothing more than an ordinary banking

relationship existed at the time of the fraud. The Sterns originally did their banking with

Norwest, but Norwest merged with Wells Fargo in 1998. Dkt. #39 at ¶ 11. At the time of

their dealings with Mrs. Bennett in 2007, the Sterns had one line of credit and two brokerage

accounts with Wells Fargo. Id. at ¶ 13-14. This relationship did not give rise to a fiduciary

or special duty under Arizona law. McAlister, 829 P.2d at 1258. Arizona courts have found

a fiduciary duty between a bank and a customer only one time, when “(1) the bank acted as

the customer’s financial advisor for many (twenty-three) years, and (2) the customer relied

upon the bank’s financial advice.” Id. When a plaintiff is simply a bank customer, Arizona

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courts hold “as a matter of law [that] no fiduciary relationship exist[s].” Id. The Sterns do

not allege that Wells Fargo acted as their financial advisor.

The Sterns assert other facts in support of a fiduciary duty. They argue that they

“bought a building from Wells Fargo in 2002, maintained personal and business bank

accounts with Wells Fargo until about 2003, continued to receive account statements from

Wells Fargo on a line of credit through 2008, maintained personal and brokerage accounts

with Wells Fargo, two of which were not closed until early 2008 and 2009, and, to this day,

continue to receive online newsletters from Wells Fargo sent to its customers.” Dkt. #53 at

4. Taken as true, these additional facts merely show that the Sterns maintained a banking

relationship with Wells Fargo. The fact that they bought a building from Wells Fargo, with

funds provided by another bank (Dkt. #39 at ¶ 13), adds nothing to their duty argument. 

The Sterns cite Kesselman v. National Bank of Arizona, 937 P.2d 341 (Ariz. App.

1997), for the proposition that a simple customer relationship is sufficient to create a duty of

disclosure. In Kesselman, a company sought financing from National Bank of Arizona for

a real estate project. A loan officer at the bank informed the company that the bank could

not finance the project, and referred the company to mortgage lenders who might wish to

provide financing. The mortgage lenders decided to loan money to the company. Escrow

services for the loan closing were to be handled by Charter Title, an agency that had

numerous accounts at National Bank. National Bank suspected Charter Title of check kiting,

but did not tell the mortgage lenders of this suspicion. Charter Title kited several checks

during the escrow process and, as a result, the mortgage lenders suffered losses. The

mortgage lenders later sued National Bank, arguing that the bank owed them a “duty to take

affirmative measures to avoid any loss to them caused by Charter Title’s check kiting.” Id.

at 344. The Arizona Court of Appeals disagreed and held that the Bank owed no duty to the

mortgage lenders.

Contrary to the Sterns’ argument, Kesselman does not stand for the proposition that

a duty of disclosure automatically exists between a bank and its customer. Kesselman did

not hold that such a duty exists. Rather, the Sterns rely on dictum in Kesselman’s discussion

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of Dodd v. Citizens Bank, 272 Cal.Rptr. 623 (Cal. App. 1990), a case applying California

law. Kesselman stated that Dodd “implicitly stands for the proposition that absent a customer

or other special relationship, a bank does not owe a duty of disclosure, even when its

customer is a fiduciary.” Kesselman, 937 P.2d at 346. Kesselman made this statement in

explaining why Dodd did not support the mortgage lenders’ claim that National Bank owed

them a duty, but Kesselman’s distinguishing of Dodd is not the same as its adoption of Dodd

as the law of Arizona. Kesselman’s dictum is simply too thin a reed upon which to hang the

duty claimed by the Sterns. McAlister provides more direct authority. 

 Moreover, if the Court were to look to Kesselman’s dicta for guidance, the more

probative dicta would be found in Kesselman’s discussion of three other non-Arizona cases

and their common holding that a bank’s direct involvement with a third party in the very

transaction that gave rise to the litigation “satisfied the necessary relationship giving rise to

the duty of disclosure.” Id. at 345. Wells Fargo was not directly involved in any transactions

between the Sterns and Mrs. Bennett. 

Finally, the Court notes that the Arizona Supreme Court has described Kesselman as

holding that no duty arises “absent a special relationship between the bank and the

investors.” Wells Fargo Bank v. Ariz. Laborers, Teamsters and Cement Masons Local No.

395 Pension Trust Fund, 38 P.3d 12, 22 (Ariz. 2002) (Arizona Laborers). The Arizona

Supreme Court made no suggestion that Kesselman creates a duty merely from a customer

relationship.

2. Actual Knowledge of Fraud.

The Sterns argue that Wells Fargo had a duty to disclose Mrs. Bennett’s fraud because

it had actual knowledge of their fraudulent activities. In support, the Sterns cite Arizona

Laborers, which, they contend, held that “a duty to disclose may arise in ‘special

circumstances,’ including when a bank has actual knowledge of a customer’s fraudulent

activities.” Dkt. #53 at 5 (quoting Arizona Laborers, 38 P.3d at 22-23). 

Arizona Laborers, however, was not a negligence case. It concerned intentional torts.

The Arizona Supreme Court specifically noted that negligence-based claims and their

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“predicate legal duty” were “not applicable to the intentional tort claims” before it. 38 P.3d

at 22. While it is true that Arizona Laborers discussed the duty that may arise from actual

knowledge, it did so in the context of intentional tort claims only, ultimately concluding that

“it was error for the lower courts to dismiss all of the Funds’ intentional tort claims by . . .

relying on the Bank’s alleged lack of duty to make disclosure.” Id. at 23.

This Court must look to Arizona negligence law to determine whether a duty exists

in this case. Duty as an element of negligence was discussed recently by the Arizona

Supreme Court in Gipson. The Supreme Court provided this relevant guidance:

A fact-specific analysis of the relationship between the parties is a

problematic basis for determining if a duty of care exists. The issue of duty is

not a factual matter; it is a legal matter to be determined before the

case-specific facts are considered. Accordingly, this Court has cautioned

against narrowly defining duties of care in terms of the parties’ actions in

particular cases. “[A]n attempt to equate the concept of ‘duty’ with such

specific details of conduct is unwise,” because a fact-specific discussion of

duty conflates the issue with the concepts of breach and causation. Thus, the

court of appeals erred in focusing on the facts of the particular relationship

between Kasey and Followill in determining if a duty exists.

. Gipson, 150 P.3d at 232 (citations omitted, emphasis added).

This explanation makes clear that a court applying Arizona law should not consider

the facts of a particular case when deciding duty. See also Markowitz v. Ariz. Parks Bd., 706

P.2d 364, 366 (Ariz. 1985); Coburn v. City of Tucson, 651 P.2d 1078, 1080 (Ariz. 1984).

That includes facts concerning Wells Fargo’s alleged knowledge of Mrs. Bennett’s fraud.

While those facts might be relevant to prove breach if a duty is found to exist, they are not

to be considered in deciding whether a duty exists in the first instance. Gipson, 150 P.3d at

232. Duty is “is a legal matter to be determined before the case-specific facts are

considered.” Id.

3. Public Policy.

Finally, the Sterns argue that public policy supports a finding that Wells Fargo owed

them a duty. The duty advocated by the Sterns is extraordinarily broad. The Sterns would

have the Court hold that banks (and investment firms) whose customers defraud third persons

have a duty to those third persons to detect and prevent the customers’ fraud. Such a duty

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would transform banks and investment firms into fraud police, duty-bound to detect and

reveal fraud that might be committed by one of their thousands of customers on some

unknown third persons, holding the banks and investment firms financially liable for the

losses suffered by those third persons.

The Sterns cite no Arizona case that has recognized such a far-reaching duty. Instead,

they cite various Arizona criminal statutes prohibiting securities fraud and other wrongs,

arguing that the Court should impose a duty on Wells Fargo based on those statutes. The

Court previously rejected this argument:

The Sterns argue that several Arizona statutes prohibiting securities

fraud, consumer fraud, and racketeering create a duty between Wells Fargo

and the Sterns. The Sterns also refer to federal money laundering statutes and

even the Patriot Act. These state and federal statutes could create a negligence

duty under Gipson, however, only if Wells Fargo violated them. Wells Fargo

is not accused of securities fraud, consumer fraud, or money laundering, and

the Sterns do not allege that Wells Fargo violated the Patriot Act. Rather,

Wells Fargo stands accused in this case of failing to detect fraudulent activity

in one of its customer’s accounts and failing to close the accounts or disclose

the activity to law enforcement. The Sterns cite no statute that makes such

conduct criminal as required in Gipson.

The Sterns assert that Wells Fargo had an obligation to file suspicious

activity reports under federal and state law. But in addition to the fact that the

statutes cited by the Sterns are not criminal, the Sterns make no attempt to

show that the statutes are designed to protect the Sterns and other similarly

situated persons from the type of harm that resulted from the Bennetts’ fraud.

Gipson, 150 P.3d at 233. Moreover, as Wells Fargo notes, these statutes

require that suspicious activity reports filed with the government be kept

confidential. See A.R.S. § 6-1241(O); 31 U.S.C. § 5318(g). Numerous courts

have held that they do not give rise to private rights of action. See, e.g., S.

Appalachian Coal Sales v. Citizens Bank of N. Ky., 2008 WL 4467297, *11

n.15 (E.D. Ky. 2008); Carran v. Morgan, 2007 WL 3520480, *5 (S.D. Fla.

2007); Commerce Bank/Penn. v. First Union Nat’l Bank, 911 A.2d 133 (Pa.

Super. Ct. 2006).

Stern, 2009 WL 3352408 at *6. 

In their second amended complaint, the Sterns do allege that Defendants failed to

report to the Arizona Attorney General certain monetary transactions that reflected Mrs.

Bennett’s violation of criminal money laundering laws. Dkt. #39 at ¶ 185(iv)-(v). But

monetary transaction reporting laws generally are intended to aid law enforcement in

detecting and preventing criminal activity. See A.R.S. § 6-1242 (authorizing Attorney

General to investigate whether any person is engaged in money laundering); State ex rel.

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Goddard v. W. Union Fin. Servs., Inc., 166 P.3d 916, 927 (Ariz. App. 2007) (purposes of

A.R.S. §§ 6-1241, 6-1242 are to enable Attorney General to investigate money laundering).

The duty imposed on Wells Faro by such statutes is to the State of Arizona, not to the Sterns.

To conclude that such a duty can be expanded to create a tort duty to the Sterns – in effect,

to all those who might have been harmed by the money laundering, or the crime underlying

the money laundering – would be to recognize a duty far more expansive than that

recognized in the monetary reporting laws themselves. The Restatement (Second) of Torts

§ 288 has made clear that a court “will not adopt as the standard of conduct . . . the

requirements of a legislative enactment . . . whose purpose is found to be exclusively (a) to

protect the interests of the state.” The comments on this section of the Restatement are

instructive:

Many legislative enactments and regulations are intended only for the

protection of the interests of the community as such, or of the public at large,

rather than for the protection of any individual or class of persons. Such

provisions create an obligation only to the state . . . . The standard of conduct

required by such legislation or regulation will therefore not be adopted by the

court as the standard of a reasonable man in a negligence action brought by the

individual.

Restatement (Second) of Torts § 288 cmt. b. 

In light of these principles, the Court will not impose the broad duty advocated by the

Sterns absent some clear indication that Arizona courts recognize such a duty. The Sterns

have cited no such Arizona authority, and Gipson suggests a more modest approach. Gipson

recognizes that “[n]ot all criminal statutes . . . create duties in tort.” 150 P.3d at 233. It holds

that “[a] criminal statute will establish a tort duty only if the statute is designed to protect the

class of persons, in which the plaintiff is included, against the risk of the type of harm which

has in fact occurred as a result of its violation.” Id. (emphasis added, quotation marks and

brackets omitted). Similarly, the Restatement makes clear that a court should only adopt a

legislative standard as imposing a duty only when “it is acting to further the general purpose

which it finds in the legislation.” Restatement (Second) of Torts § 286 cmt. d. Not only are

the monetary reporting statutes cited by the Sterns not criminal, but they also clearly establish

a duty to the state, not to unknown third parties. The Sterns have not shown that they are

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among the class of persons the reporting statutes are intended to protect, nor that the harm

the Sterns suffered – fraud by Mrs. Bennett – is the harm that results when banks fail to make

reports to the Attorney General. The harm in Gipson was much more directly a result of the

Defendant’s action and the statute’s violation. The defendant in Gipson provided

prescription drugs that caused the plaintiff’s death. The statue that gave rise to the

defendant’s duty prohibited precisely that action – distributing prescription drugs. Id. No

similarly direct connection exists between the statutory requirement that Wells Fargo send

reports to the Attorney General and the harm suffered by the Sterns when they were

defrauded by Mrs. Bennett. 

In summary, the Sterns have not shown as a matter of Arizona law that Wells Fargo

owed them a duty. In the absence of duty, there can be no claim for negligence. Id. at 230.

B. Schwab.

The Sterns allege that Schwab owed them a duty to “approve, supervise, and control”

Mrs. Bennett’s accounts and “to abide by prevailing laws, public policy, and industry

standards.” Dkt. #39 at ¶ 184. In addressing the question of Schwab’s duty, the parties focus

their attention on several cases from other jurisdictions, including Bear, Stearns & Co. v.

Buehler, 432 F. Supp. 2d 1024 (C.D. Cal. 2000), Rolf v. Blyth, Eastman Dillon & Co., 637

F.2d 77 (2d Cir. 1980), Congregation of the Passion v. Kidder Peabody & Co., 800 F.2d 177

(7th Cir. 1986), and Software Design and Application, Ltd. v. Hoefer & Arnett, Inc., 56

Cal.Rptr.2d 756 (Cal. App. 1996). None of these cases applies Arizona law. 

While discussing these cases, the Sterns argue that “there must be a fact intensive

inquiry” to determine whether a duty exists on the part of Schwab, and that judgment on the

pleadings is not appropriate when such factual issue must be resolved. Dkt. #46 at 5

(emphasis in original). As explained above, however, the Arizona Supreme Court has

eschewed a fact-specific determination of duty. Arizona law holds that “[t]he issue of duty

is not a factual matter; it is a legal matter to be determined before the case-specific facts are

considered.” Gipson, 150 P.3d at 232 (emphasis added); see also Markowitz, 706 P.2d at

366; Coburn, 651 P.2d at 1080. If the Court is true to Arizona law, it cannot find a duty in

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2

 The Sterns do not assert, as they did against Wells Fargo, that a fiduciary

relationship existed between them and Schwab. Nor could they, given that they were not

customers of Schwab.

3

 The Sterns cite various other alleged sources of duty, including stock exchange rules,

Wells Fargo ethical guidelines, Schwab internal manuals, and general federal laws. Dkt. #39

at ¶¶ 43-45, 78. They cite no Arizona authority to support their claims that these sources

give rise to a negligence duty under Arizona law. 

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this case by evaluating the detailed facts set forth in the Sterns’ brief. The Court must look

to broader principles and decide the issue as a matter of law.2

The second amended complaint identifies a number of Arizona statutes prohibiting

securities fraud, consumer fraud, racketeering, and money laundering. Dkt. #39 at ¶ 185(i)-

(v). The Sterns allege that Mrs. Bennett, not Schwab, violated each of these statutes. Id.

Assuming these allegations to be true, the public policy reflected in the criminal statutes is

that individuals in the position of Mrs. Bennett should not act to defraud individuals in the

position of the Sterns in the manner proscribed by the statute. The statutes do not criminalize

the alleged actions of Schwab – failing to intervene to stop Mrs. Bennett’s fraud – and

therefore do not reflect a public policy that imposes a duty on Schwab. Without clear support

in Arizona law, the Court cannot conclude that the public policy reflected in an Arizona

criminal statute creates a tort duty not only for persons who violate the statute, but also for

all persons who know of the violation. The Sterns provide no clear support for this

proposition. 

As noted above, the Sterns do allege that Defendants failed to report to the Arizona

Attorney General certain monetary transactions that reflected Mrs. Bennett’s violation of

criminal money laundering laws. Id. at ¶ 185(iv)-(v). For the reasons explained above,

however, the Court does not conclude that a duty to report financial transactions to the State

of Arizona can be expanded to create a tort duty to all of the unknown persons who might

be harmed by the criminal actions of the person whose transactions should have been

supported. The Sterns have provided no authority to suggest that Arizona courts would

recognize such a broad duty.3

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4

 In six separate counts, the Sterns allege that Wells Fargo and Schwab aided and

abetted Mrs. Bennett’s fraud, breach of fiduciary duty, and securities fraud. Dkt. #39 at ¶¶

123-179. The Court concludes that the knowledge requirement is the same for all of these

claims: Defendants must be shown to have had actual knowledge of the tort they are alleged

to have aided and abetted. For the sake of simplicity, the Court will address aiding and

abetting fraud in the text of this order. The Court’s reasoning applies as well to the claims

for aiding and abetting breach of fiduciary duty and securities fraud, which are based on the

same facts as the fraud claim. Id.

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The Sterns have not shown, as a matter of Arizona law, that Schwab owed a duty to

them. As a result, Schwab is entitled to judgment on the pleadings on the negligence claim.

IV. The Aiding and Abetting Claims.

To state a claim for aiding and abetting, the Sterns must plead three elements: (1) Mrs.

Bennett committed a tort that caused injury to the Sterns, (2) Defendant knew Mrs. Bennett’s

conduct constituted a tort, and (3) Defendant substantially assisted or encouraged Mrs.

Bennett in the achievement of the tort. Arizona Laborers, 38 P.3d at 23. Wells Fargo and

Schwab argue that the Sterns have failed to plead facts sufficient to establish the second and

third elements – knowledge and substantial assistance. Because the Court concludes that the

Sterns have failed to plead facts showing knowledge, it need not address substantial

assistance.4

A. The Arizona Requirement of Actual Knowledge.

The Arizona Supreme Court has stated that “‘aiding and abetting liability is based on

proof of scienter . . . the defendants must know that the conduct they are aiding and abetting

is a tort.’” Id. (quoting Witzman v. Lehrman, Lehrman & Flom, 601 N.W.2d 179, 186 (Minn.

1999) (ellipsis and emphasis in original)). As this Court previously noted, “mere knowledge

of suspicious activity is not enough.” Stern, 2009 WL 3352408 at *7. “The defendant must

be aware of the fraud.” Id. (citing Dawson v. Withycombe, 163 P.3d 1034 (Ariz. App.

2007)). 

The Arizona Supreme Court’s decision in Arizona Laborers provides a guide to the

level of knowledge required for aiding and abetting liability. In Arizona Laborers, the

defendant bank entered into a tri-party agreement with Symington (the alleged wrongdoer)

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and the plaintiff pension funds (“Funds”). Under the agreement, the bank would lend money

to Symington for a construction project, and the Funds would provide Symington with

permanent financing for the project that would repay the bank’s loan. 38 P.3d at 17-18. The

Funds later sued the bank for aiding and abetting Symington’s fraud on them. In finding

sufficient circumstantial evidence to conclude that the bank had “actual knowledge” that

Symington was defrauding the Funds, the Arizona Supreme Court relied on these facts,

among others: the bank knew Symington had a duty under his agreement with the Funds to

provide accurate financial information to the Funds; the bank knew Symington was using

false financial statements; the bank knew Symington was in financial trouble on another

development that involved the bank, but did not involve the Funds; the bank knew

Symington was representing that he had access to securities to which he actually had no

access; the bank knew Symington was overstating the value of his real estate holdings; the

bank knew Symington was asserting that there was no prospect of litigation, when in fact he

was facing litigation on other projects; and the bank knew Symington was making these

misrepresentations concerning his financial condition as the time for the Funds’ permanent

financing approached – permanent financing that would repay the bank’s loan. Id. at 24-26.

The Arizona Supreme Court held that “[t]his accumulation of evidence raises the inference

that the Bank knew Symington was engaged in false representations to the Funds.” Id. at 26

(emphasis added). This finding of actual knowledge led the Supreme Court to hold that the

bank could be liable to the Funds, its co-party in the tri-party agreement. Id.

This knowledge requirement has been confirmed in subsequent Arizona cases. As this

Court explained in its earlier ruling: 

Arizona cases applying the scienter requirement of Arizona Laborers

make clear . . . that mere knowledge of suspicious activity is not enough. The

defendant must be aware of the fraud. In Dawson v. Withycombe, 163 P.3d

1034 (Ariz. App. 2007), the Arizona Court of Appeals held that knowledge of

a defrauder’s poor financial condition or dishonesty was not enough to satisfy

the scienter requirement for aiding and abetting: “That Turner and

Withycombe were aware of Futech’s financial condition and of Goett’s

dishonest character, and were aware that he was soliciting funds from Dawson,

indicates poor judgment and risky business practices. It does not, however,

rise to the level of scienter required for aiding and abetting, specifically that

they were aware that Goett did or would in fact use fraudulent statements as

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a means of procuring the loan.” Id. at 1053 (emphasis in original). Dawson, which applied the language from Arizona Laborers upon which the Sterns rely,

thus makes clear that suspicion is not enough. The aiding and abetting

defendant must be aware of the fraud. This holding comports with the

statement in Arizona Laborers that the defendant must have “‘general

awareness’ of the customer’s fraudulent scheme.” 38 P.3d at 26 (emphasis

added).

Stern, 2009 WL 3352408 at *7.

The Sterns argue for a different legal standard. They contend that a reckless disregard

for fraud is sufficient scienter for aiding and abetting. In support, they cite three non-Arizona

cases: Levine v. Diamanthuset, Inc., 950 F.2d 1478, 1483 (9th Cir. 1991) (applying

California law); In re Am. Cont’l Corp., 794 F. Supp. 1424, 1434 (D. Ariz. 1992) (applying

federal law); Fraternity Fund Ltd. v. Beacon Hill Asset Mgmt., LLC, 479 F. Supp. 2d 349,

368 (S.D.N.Y. 2007) (applying New York law). This Court must follow Arizona law.

Arizona Laborers makes clear that knowledge of the fraud is required. 38 P.3d at 23, 26.

Dawson confirms this requirement. 163 P.3d at 1053. The Court will not accept the Sterns’

invitation to adopt of version of aiding and abetting broader than Arizona allows. 

B. Wells Fargo.

The Sterns allege that Wells Fargo “knew of, had actual knowledge of, and/or was

generally aware of . . . the Bennetts’ fraudulent Ponzi scheme.” Dkt. #39 at ¶ 7. As the

United States Supreme Court has made clear, such a conclusory allegation will not overcome

a motion to dismiss. In Iqbal, the plaintiff alleged that the defendants “knew of, condoned,

and willfully and maliciously agreed to” violate his constitutional rights. 129 S. Ct. at 1951.

The Supreme Court held, however, that “[t]hese bare assertions, much like the pleading of

conspiracy in Twombly, amount to nothing more than a ‘formulaic recitation of the elements’

of a constitutional discrimination claim[.]” Id. (quoting Twombly, 550 U.S. at 555). “As

such,” the Court explained, “the allegations are conclusory and are not entitled to be assumed

true.” Id. Rather, a court must “consider the factual allegations in [the] complaint to

determine if they plausibly suggest an entitlement to relief.” Id. Applying this teaching from

Iqbal, the Court must look to the facts alleged in the Sterns’ second amended complaint to

determine if the knowledge requirement of aiding and abetting has been pled. The Court

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must determine whether the complaint “pleads factual content that allows the court to draw

the reasonable inference that the defendant is liable for the misconduct alleged.” Id. at 1949.

The Sterns contend that the following circumstantial facts are sufficient to show Wells

Fargo knew of Mrs. Bennett’s fraud:

(1) Dr. Bennett was a retired physician, Ms. Bennett was an unemployed

housewife, neither were licensed, trained or experienced securities traders, and

together they had diminished savings, a lack of income, a relatively low net

worth and substantial, mounting debt; (2) a total of $10,752,500.00 in checks,

which were all in large, round dollar amounts of money from random third

parties, were deposited into the Bennetts’ PMA Account . . . without any

justifiable purpose, and some of the checks specifically indicated in the memo

section that they were for a “loan” or investment; (3) some of the money in the

Bennett account was regularly transferred in large, round dollar amounts to

[Schwab], a universally known investment services firm; (4) some of the

money was immediately spent on lavish jewelry, luxury goods, a substantial

mortgage for a penthouse, fancy cars, enormous charge card expenses and

lines of credit, and gifts to charities; (5) some of the money was immediately

sent in large, round dollar amounts to the Bennetts’ children; (6) money was

transferred back in large, round dollar amounts from [] Schwab to the

Bennetts’ account; (7) the Bennetts issued checks in large, round dollar

amounts of money to third parties without any justifiable purpose other than

the fact that the parties had originally deposited larger amounts of money with

the Bennetts; (8) the Bennetts frequently and extensively used ATM machines

for very large cash withdrawals (including a total of $25,800 in just a 90-day

period); (9) the Bennetts’ account had large, sudden and negative balances that

caused several checks to bounce, thereby creating a large number of

overdrafts, insufficient funds charges, and necessary reversals and repayments,

which required the programming, oversight and approval of Wells Fargo

personnel; (10) none of these account activities could be reconciled with the

Bennetts’ known personal and financial background; and (11) all of these

activities were entirely inconsistent with the Bennetts’ account history (which

had average monthly deposits of $25,717 and average monthly expenses of

$29,714 before the Ponzi scheme, but had average monthly deposits of

$717,032 and average monthly expenses of $713,305 during the Ponzi

scheme).

Dkt. #53 at 6-7. 

Accepted as true, these facts support a reasonable inference that Wells Fargo knew

of unusual, unprecedented, and unexplained levels of activity in the Bennetts’ account.

Wells Fargo reasonably knew that the Bennetts had come into large amounts of money

beyond their own means, that they were transferring substantial funds to and from Schwab,

that they were transferring money to and from other individuals, that they were distributing

money to family, and that they were spending lavishly. In other words, Wells Fargo had

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good reason to be suspicious about the activity in the Bennetts’ account. Or, as the Sterns

allege repeatedly, these facts raised “red flags” that should have prompted greater inquiry.

Dkt. #39 at ¶¶ 36, 67, 77, 79. As explained above, however, suspicious activity does not

satisfy the knowledge requirement of Arizona’s aiding and abetting law.

These facts do not support a reasonable inference that Wells Fargo knew Mrs. Bennett

was defrauding investors. The Sterns do not allege that Wells Fargo knew anything about

her relationship with the individuals who provided the funds in her account. The Sterns

allege that some checks deposited in the Bennetts’ account included notations such as “loan”

or “investment” in the memo line. Dkt. #39 at ¶ 76. Even if it could be inferred that the bank

was conscious of these notations (typically provided so the check writer can keep track of

why a check is written), the Sterns do not allege that Wells Fargo knew the nature of the

loans or investments, that the money was provided on the basis of Mrs. Bennett’s false

representations, or that the money was provided on the basis of her promised 240-360%

annual returns. Indeed, the Sterns do not allege that Wells Fargo knew anything about the

relationship Mrs. Bennett had with the Sterns or other investors, the communications she had

with them, or the level of disclosures she made to them. 

The Sterns have not pled facts comparable to those found sufficient in Arizona

Laborers. The Sterns do not allege that they were in a contractual relationship with Mrs.

Bennett and Wells Fargo comparable to the tri-party agreement between Symington, the

Funds, and the bank. The Sterns do not allege that Wells Fargo knew any of the details about

the Sterns’ dealings with Mrs. Bennett comparable to the detailed information possessed by

the bank in Arizona Laborers. Where the circumstantial evidence in Arizona Laborers

showed that the bank actually knew that one of their partners in the tri-party agreement was

defrauding the other partner, the evidence in this case provides no such knowledge and no

such connection. 

As explained by the Supreme Court in Iqbal, it is not enough that facts alleged in a

complaint are “consistent” with wrongful conduct – in this case, with knowingly aiding and

abetting. The facts must “plausibly establish” the wrongful conduct. 129 S. Ct. at 1951

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(“Taken as true, these allegations are consistent with petitioners’ purposefully designating

detainees of ‘high interest’ because of their race, religion, or national origin. But given more

likely explanations, they do not plausibly establish this purpose.”). If the facts alleged are

susceptible of two possible interpretations, one supporting liability and the other not, and the

facts alleged do not make the liability-creating inference more plausible, then the complaint

fails to state a claim. Id. (“As between [the] obvious alternative explanation [that the

plaintiff was arrested for a legitimate law enforcement purpose], and the purposeful,

invidious discrimination respondent asks us to infer, discrimination is not a plausible

conclusion.”) (quotation marks and citation omitted). 

In this case, the factual allegations of the second amended complaint permit a

reasonable inference that Wells Fargo had reason to be suspicious about the Bennetts’

account – that it knew of red flags. The Sterns ask the Court to draw the stronger inference

that Wells Fargo actually knew of Mrs. Bennett’s fraud. As between these two, the first

inference clearly is more directly supported by the alleged facts. Just as the complaint in

Iqbal did not “contain any factual allegation sufficient to plausibly suggest petitioners’

discriminatory state of mind,” 129 S. Ct. at 1952, the Sterns’ complaint does not contain any

factual allegation sufficient to plausibly suggest Wells Fargo actually knew of Mrs. Bennett’s

fraud. 

The Sterns seek to bolster their 55-page second amended complaint with some 500

pages of exhibits, including affidavits from two experts. They contend that the affidavits

provide circumstantial facts showing actual knowledge of the fraud on Wells Fargo’s part.

The Court disagrees. Under the heading “Did Wells Fargo have actual knowledge of the

fraud?” expert Charles Grice asserts that Wells Fargo knew of red flags: “multiple parts of

the bank were aware of the anomalous and irregular transactions flowing through the Bennett

account,” and the bank “had sufficient alerts or alarms to stop the transactions as a means of

protecting the Bank’s reputation, these monies, and the innocent people involved.” Dkt. #39-

5 at 14. He does not opine that Wells Fargo actually knew of the fraud. 

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Expert Peter Davis conducted a detailed analysis of the Bennetts’ account and found

evidence to support his conclusion that Mrs. Bennett was operating a Ponzi scheme. He

opines: “The Bennett Wells Fargo Account records, including bank statements, canceled

checks and deposits show the Bennett Wells Fargo Account was used to operate a Ponzi

scheme.” Dkt. #39-3 at 7. Davis does not opine that Wells Fargo also knew this fact, nor

does he explain how Wells Fargo could have replicated his detailed analysis conducted with

the benefit of two years’ hindsight and knowledge of Mrs. Bennett’s fraud. 

Thus, when it comes to Wells Fargo’s actual knowledge of fraud, the experts add little

beyond the allegations of the second amended complaint that Wells Fargo knew of unusual,

unprecedented, and unexplained levels of activity in the Bennetts’ account. They do not

show that Wells Fargo knew Mrs. Bennett was defrauding the Sterns – the level of

knowledge found sufficient in Arizona Laborers.

Finally, the Sterns argue that Wells Fargo had actual knowledge of the fraud because

Melissa Dreifuerst, a vice president of a separate division of Wells Fargo – Wells Fargo

Business Credit Company, Inc., located in Milwaukee, Wisconsin – knew about the fraud

because she also invested with Mrs. Bennett. Dkt. #53 at 9. They contend that the following

facts show actual knowledge or at least circumstantial evidence of actual knowledge:

(1) Dreifuerst, a Wells Fargo vice president, invested with Mrs. Bennett (Dkt. #39 at ¶ 80),

(2) Dreifuerst stopped investing before the Ponzi scheme failed and got most of her money

back (Dkt. #39 at ¶ 82), (3) Dreifuerst knew enough facts to be aware of the Ponzi scheme

and either participated in it or recklessly disregarded the facts (Dkt. #39 at ¶ 88),

(4) Dreifuerst’s actions were in violation of Wells Fargo’s code of ethics (Dkt. #39 at ¶ 90),

and (5) Dreifuerst was required to inform her supervisors of Mrs. Bennett’s fraud (Dkt. #39

at ¶ 90). The Sterns do not allege that Dreifuerst, who is a relative of Mrs. Bennett,

participated with Mrs. Bennett as part of Dreifuerst’s employment at Wells Fargo. They do

not allege that she acted on behalf of Wells Fargo in any dealings with Mrs. Bennett. To the

contrary, they allege that she violated the Wells Fargo code of ethics by her actions. Id.

Thus, even if it is assumed that each of these facts is true, they do not constitute actions by

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Wells Fargo or knowledge on the part of Wells Fargo. More importantly, they do not amount

to the widespread and actual knowledge of fraud that existed within the bank in Arizona

Laborers. 38 P.3d at 24-26.

The Sterns contend that the Court must assume that Dreifuerst, who had a duty to

inform Wells Fargo of Mrs. Bennett’s fraud, actually did inform Wells Fargo because of “a

conclusive presumption that the agent will communicate to the corporation whatever

knowledge or notice he receives in relation to his agency.” Dkt. #53 at 10 & n.9 (quoting

Fridena v. Evans, 622 P.2d 463, 466 (Ariz. 1980)) (emphasis added). But the Sterns have

failed to plead facts showing that she received information about Mrs. Bennett in relation to

her agency as required by this authority. To the contrary, they allege that she received

knowledge through her family connections with Mrs. Bennett and violated the Wells Fargo

code of ethics in the process. Dkt. #39 at ¶¶ 82, 90. The Sterns have failed to allege facts

showing that Dreifuerst’s knowledge should be imputed to Wells Fargo. 

In summary, the Sterns have failed to plead facts showing the scienter required for

aiding and abetting. The Court will therefore grant Wells Fargo’s motion to dismiss the

aiding and abetting claims. 

C. Schwab.

Schwab also argues that the Sterns have failed to allege facts showing that it knew of

Mrs. Bennett’s fraud. Taking the facts in the second amended complaint as true and

construing them in the Sterns’ favor, the Court agrees. 

As noted above, the Sterns’ conclusory allegation that Schwab knew of Mrs. Bennett’s

fraud need not be accepted as true under Iqbal. 129 S. Ct. at 1951. Rather, the Court must

“consider the factual allegations in [the] complaint to determine if they plausibly suggest an

entitlement to relief.” Id.

The key facts are summarized in three paragraphs in the second amended complaint

and several paragraphs in an affidavit from securities expert Robert W. Lowry. The Sterns

allege the following:

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Defendant Schwab knew of, had actual knowledge of and/or was generally

aware of, the breach being committed by the Bennetts given its supervision

and control of the Schwab Account, its acceptance of significant funds from

the Wells Fargo PMA Account, and its extension of credit (margin) that aided

the Bennetts in leveraging the funds in the Schwab Account. The amount of

money transferred and recycled to and from the account greatly exceeded the

amounts that could have been supported by the Bennetts’ income, as indicated

on their account application. The use of significant margin, engaging in day

trading and short selling, the frequent turnover and recycling of funds in the

account, and the large transfers in and out of the account must have alerted

Defendant Schwab of the dubious, indeed illegal, activity taking place in the

Schwab Account, prompting inquiry and action to expose and stop the fraud.

Dkt. #39 at ¶ 138. The facts pled in this paragraph are as follows: (1) Schwab supervised

Mrs. Bennett’s account, (2) Schwab accepted significant funds from a different account,

(3) Schwab extended credit to Mrs. Bennett, (4) the amount of money moving in and out of

Mrs. Bennett’s accounts was higher than could have been supported by the Bennetts’ income,

and (5) Mrs. Bennett used significant margin, engaged in day trading, turned over significant

funds, and made large transfers. Id. The Sterns allege, in effect, that these facts provided

Schwab with sufficient information to prompt an investigation that would have exposed and

stopped the fraud. In other words, this account, like the Wells Fargo account, raised red flags

that should have attracted Schwab’s attention. Indeed, the Sterns repeatedly allege that the

account contained “red flags.” Id. ¶¶ at 98, 105, 110.

Paragraphs 155 and 175 are similar. They allege that (1) Schwab supervised and

controlled Mrs. Bennett’s account, (2) Schwab accepted significant funds from a different

account, (3) there were numerous transfers to and from another account, (4) millions of

dollars cycled through the account, (5) Schwab extended credit to Mrs. Bennett, (6) the

amounts of money moving in and out of the accounts were higher than could have been

supported by the Bennetts’ income, and (7) Schwab knew that Mrs. Bennett’s stock trades

were unprofitable. Id. ¶¶ at 155, 175. Again, these facts suggest that Schwab had reason to

suspect some impropriety in Mrs. Bennett’s account.

Lowry contends in his affidavit that Schwab monitored the trading activity in Mrs.

Bennett’s account, saw that she lost significant amounts of money (Dkt. #46-1 at ¶ 48), and,

in his opinion, “had actual knowledge of Deborah Bennett’s fraudulent activity, the operation

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of a Ponzi scheme and money laundering” (Dkt. #46-1 at ¶ 61). This opinion of actual

knowledge, of course, is not a statement of fact. It is an opinion Lowry asserts as the Sterns’

expert. Like conclusory allegations of actual knowledge in the complaint, it must be based

on factual allegations. The facts relied on by Lowry are those asserted in the complaint:

Schwab had reason to know Mrs. Bennett was trading frenetically, with transfers from other

accounts and money beyond her means, and was incurring substantial losses. 

Accepting these facts as true and viewing them in the light most favorable to the

Sterns, the Court reasonably can infer that Schwab had good reason to be concerned about

the propriety of Mrs. Bennett’s trading practices. But these facts do not reasonably support

an inference that Schwab actually knew of Mrs. Bennett’s fraud. The Sterns do not allege

that Schwab knew other individuals were investing with Mrs. Bennett, only that she was

transferring large sums of money from a Wells Fargo account. They do not allege that

Schwab knew anything about Mrs. Bennett’s relationship with the investors, representations

to the investors, or disclosures to the investors. They do not allege that Schwab knew that

Mrs. Bennett was transferring funds to her family, spending lavishly, or remitting funds to

investors. 

As with Wells Fargo, the facts alleged in the complaint, taken as true, support a

reasonable inference that Schwab had reason to be suspicious of Mrs. Bennett’s trading

activities and reason to inquire further. Indeed, this is precisely what the Sterns allege. See

Dkt. #39 at ¶ 98. When compared to the inference the Sterns would have this Court draw –

that Schwab actually knew of Mrs. Bennett’s fraud – the suspicious-activity inference is

clearly the more plausible. Under Iqbal, the Sterns have failed to plead facts supporting a

reasonable inference of actual knowledge on the part of Schwab. And without such actual

knowledge, aiding and abetting liability does not arise under Arizona law. Arizona Laborers,

38 P.3d at 26; Dawson, 163 P.3d at 1053. 

In summary, the Sterns’ second amended complaint does not permit the Court “to

infer more than the mere possibility of misconduct.” Iqbal, 129 S.Ct. at 1950. “[T]he

complaint has alleged – but it has not ‘show[n]’ – ‘that the pleader is entitled to relief.’” Id.

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at 1950 (citing Fed. R. Civ. P. 8(a)(2)). Because the Sterns have failed to plead the scienter

required for aiding and abetting liability under Arizona law, judgment on the pleadings must

be granted.

V. Conclusion.

As noted at the outset, this case asks whether a bank and an investment firm, under

Arizona law, have a negligence duty to protect third parties from fraud committed by a

customer of the bank and investment firm. The Court concludes that the answer is no. Once

negligence is eliminated as a possible source of liability, the Sterns are left with their claims

that Defendants aided and abetted Mrs. Bennett in her fraud, breach of fiduciary duty, and

securities fraud. The Court concludes that Arizona law requires actual knowledge of the

fraud, breach of fiduciary duty, and securities fraud before aiding and abetting liability arises,

and that the Sterns have not pled facts sufficient to show such knowledge. 

Both motions will be granted. Wells Fargo asks the Court to dismiss the claims

against it with prejudice. The Sterns do not address this request. Given that the Sterns have

made three unsuccessful attempts to plead sufficient facts to state a claim, see Dkt. #2-1 at

5-39, Dkt. #14, and Dkt. #39, the Court will grant the request and dismiss the claims against

Wells Fargo with prejudice.

IT IS ORDERED:

1. Wells Fargo’s motion to dismiss with prejudice (Dkt. #47) is granted.

2. Schwab’s motion for judgment on the pleadings (Dkt. #33) is granted.

3. The Clerk of Court shall terminate this action.

DATED this 23rd day of March, 2010.

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