United States Court of Appeals

For the Eighth Circuit

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No. 11-1213

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Robert L. McCrary; Kenneth C. Thompson, Trustee of the Kenneth C. Thompson

Living Trust U/A DTD 3-27-92; Kenneth C. Thompson, As Beneficiary of the

Kenneth C. Thompson IRA

lllllllllllllllllllll Plaintiffs - Appellants

v.

Stifel, Nicolaus & Company, Incorporated; Neil Rolla Harrison; Roger Compton

lllllllllllllllllllll Defendants - Appellees

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 Appeal from United States District Court 

for the Eastern District of Missouri - St. Louis

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 Submitted: March 14, 2012

 Filed: August 6, 2012

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Before MELLOY, SMITH, and SHEPHERD, Circuit Judges.

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SHEPHERD, Circuit Judge.

Robert L. McCrary and Kenneth C. Thompson brought suit as individuals and

on behalf of a putative class of investors, alleging that Stifel, Nicolaus & Co. (Stifel)

and two of its employees, Neil Harrison and Roger Compton, violated federal

securities law. Stifel and Compton (Defendants) filed a motion to dismiss the
complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6)

and the Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. § 78u4(b). The district court concluded that Plaintiffs’ allegations failed to satisfy the

requirements for class action claims under Federal Rule of Civil Procedure 23(b)(3)

and dismissed Plaintiffs’ complaint with prejudice. We affirmin part, reverse in part,

and remand for further proceedings.

I.

Stifel is a brokerage and investment banking firm headquartered in St. Louis,

Missouri. In October of 2005, Stifel hired Harrison to work as a broker in Stifel’s

branch office in Edwardsville, Illinois. Stifel hired Harrison almost immediately after

he wasfired by A.G. Edwards, another investment firm in St. Louis, for soliciting and

obtaining personal loans fromhis clients. During his time at Stifel, Harrison engaged

in similar misconduct and fraudulent behavior, and Stifel eventually fired Harrison

in October of 2008. Compton served as Harrison’s supervisor at the Edwardsville

branch office.

Plaintiffs held investment accounts with Stifel’s branch office in Edwardsville

between 2006 and 2009. For the majority of that time, Harrison served as Plaintiffs’

registered representative and managed their accounts. After Harrison was fired,

Compton took over the responsibility of managing Plaintiffs’ accounts. Plaintiff

Thompson alleges that his accounts sustained a diminution in value of more than

$750,000 as a result of “churning” and unauthorized trading by Harrison and that he 1

was charged $250,000 in excessive commission fees by Stifel and Harrison. Plaintiff

“‘Churning’ occurs when a broker, directing the volume and frequency of 1

trades, abuses his customer’s confidence for personal gain by initiating transactions

that are excessive in view of the character of the account and the customer’s

objectives as expressed to the broker.” Davis v. Merrill Lynch, Pierce, Fenner &

Smith, Inc., 906 F.2d 1206, 1211 n.3 (8th Cir. 1990).

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McCrary alleges damages of $400,000 due to churning and unauthorized trading plus

excessive commission fees in the amount of $40,000.

On April 7, 2009, Thompson executed a submission agreement in which he

agreed to be bound by the rules and the decisions of a Financial Industry Regulatory

Authority (FINRA) arbitration panel. Thompson subsequently filed an arbitration

claim against Stifel, Harrison, and Compton and served Stifel with the claim on June

30, 2009. On December 10, 2009, Thompson participated in a pre-hearing conference

with the selected panel of arbitrators and counsel for Stifel. Over the next few

months, Thompson filed various motions with the arbitration panel and eventually

filed a motion to have his arbitration dismissed without prejudice. This motion was

denied by the panel. The arbitration panel then ordered Thompson to comply with

Stifel’s discovery requests. After Thompson repeatedly failed to respond to the

panel’s orders, the panel held a hearing on June 28, 2010, and dismissed Thompson’s

arbitration claim with prejudice.

On December 21, 2009, McCrary filed an action in Missouri state court against

Stifel alleging violations of Missouri securities law. Before Stifel’s reply was due,

McCrary amended his petition to allege claims against Stifel on behalf of a putative

class. Stifel subsequently removed the case to federal court. McCrary then filed an

amended complaint, adding Thompson as a named plaintiff and adding Compton and

Harrison as defendants. In their amended complaint, Plaintiffs alleged violations of

sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b)

and 78t(a), and violations of Securities and Exchange Commission Rule 10b-5,

17 C.F.R. § 240.10b-5. Specifically, Plaintiffs alleged that: (1) Harrison engaged in

churning and unauthorized trading, in violation of section 10(b) and Rule 10b-5; (2)

Stifel, Compton, and Harrison made material misrepresentations and omissions,

including the repeated failure to disclose the nature of Harrison’s termination from

his prior employment at A.G. Edwards, in violation of section 10(b) and Rule 10b-5;

and (3) Stifel and Compton failed to properly supervise and take steps to prevent

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Harrison’s illegal trading, making them jointly and severally liable for Harrison’s

conduct pursuant to section 20(a). Plaintiffs then requested that the district court

enjoin Stifel from proceeding with the then-ongoing arbitration initiated by

Thompson. The court denied this request after applying the four-factor test set forth

in Dataphase Systems, Inc. v. C L Systems, Inc., 640 F.2d 109 (8th Cir. 1981) (en

banc), finding that Plaintiffs “failed to show that any of these factors weigh in favor

of granting the preliminary injunction.”

On June 4, 2010, Plaintiffs filed a motion seeking class certification and the

appointment of Thompson as lead plaintiff. On June 11, 2010, Defendants filed a

motion to dismiss Plaintiffs’ complaint for failure to state a claim under Federal Rule

of Civil Procedure 12(b)(6). Shortly thereafter, Defendants also requested that the

court defer its consideration of Plaintiffs’ motion for class certification until after the

court had ruled on Defendants’ motion to dismiss.

On December 28, 2010, the district court granted Defendants’ motion to

dismiss. The court recited the standard of review for a Rule 12(b)(6) motion and the

requirements for class-action claims under Federal Rule of Civil Procedure 23. The

court then analyzed Plaintiffs’ churning and material misrepresentation allegations

and determined that neither claim satisfied the requirements for a class action under

Rule 23(b)(3) because of the individualized nature of the allegations. The court

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concluded by stating: “Having determined that plaintiffs’ claims fail to satisfy Rule

23(b)(3), the Court findsit unnecessary to determine whether the complaint meets the

heightened pleading standard of the PSLRA.” The court dismissed Plaintiffs’ entire

Rule 23(b)(3) states that a class action may be maintained if “the court finds

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that the questions of law or fact common to class members predominate over any

questions affecting only individual members, and that a class action is superior to

other available methodsfor fairly and efficiently adjudicating the controversy.” Fed.

R. Civ. P. 23(b)(3).

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complaint with prejudice and denied all pending motions as moot. Plaintiffs

appealed.

II.

Plaintiffs raise three arguments on appeal, contending that: (1) the court failed

to engage in the proper analysis before dismissing Plaintiffs’ individual claims; (2)

the court erred in dismissing Plaintiffs’ class claims asinsufficient under Rule 23; and

(3) Thompson’s arbitration was invalid and the district court abused its discretion by

denying Plaintiffs’ motion to enjoin the arbitration. We address each of these

arguments in turn.

A. Plaintiffs’ Individual Claims

We first address Plaintiffs’ argument that the district court erred in dismissing

their individual claims. Generally, the district court’s dismissal of a complaint under

Rule 12(b)(6) and the PSLRA issubject to de novo review. See In re NVE Corp. Sec.

Litig., 527 F.3d 749, 751 (8th Cir. 2008). On a Rule 12(b)(6) motion to dismiss

securities claims, a district court must review the claims to determine their

compliance with the heightened pleading standards of the PSLRA. See Elam v.

Neidorff, 544 F.3d 921, 926-27 (8th Cir. 2008). Generally, the court must accept

Plaintiffs’ factual allegations as true and should draw all reasonable inferences in

their favor. See Lustgraaf v. Behrens, 619 F.3d 867, 872-73 (8th Cir. 2010). For

claims with a scienter component, which includes claims under Rule 10b-5, the

allegations should give rise to more than just a plausible or reasonable inference of

scienter. Elam, 544 F.3d at 928; 15 U.S.C. § 78u-4(b)(2)(A) (requiring claims to

“state with particularity facts giving rise to a strong inference that the defendant acted

with the required state of mind”). For material misrepresentation and omission

claims, the court must also determine whether the claims “specify each statement

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alleged to have been misleading [and] the reason or reasons why the statement is

misleading.” 15 U.S.C. § 78u-4(b)(1).

Plaintiffs argue that the district court failed to follow this analysis and

erroneously used the criteria for class certification to dismiss not only Plaintiffs’ class

claims, but their individual claims as well. Plaintiffs point out that the district court

only analyzed the complaint under Rule 23 and expressly declined to address the

sufficiency of the allegations under the PSLRA. Plaintiffs contend that the district

court could not dismiss their individual claims without first reviewing the substance

of those claims under the PSLRA. We agree. The district court recited the correct

standard of review for a Rule 12(b)(6) motion at the outset of its order; however, it

failed to engage in the requisite analysis. Indeed, the court expressly stated that it

found it “unnecessary to determine whether the complaint meets the heightened

pleading standard of the PSLRA,” although a Rule 12(b)(6) motion to dismiss

individual securities claims requiresthe court to make that precise determination. See

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 321 (2007); Lustgraaf,

619 F.3d at 873.

Defendants make several arguments in defense of the district court’s decision. 

First, they rely on Rowe v. Morgan Stanley Dean Witter, 191 F.R.D. 398 (D.N.J.

1999) and Moscarelli v. Stamm, 288 F. Supp. 453 (E.D.N.Y. 1968), to argue that a

court may dismiss securities fraud allegations similar to the onesin this case when the

claims do not satisfy Rule 23. In Rowe, the court found that the plaintiffs’ churning

claims rested “predominately on individual issues of fact, rather than common

questions,” and could not satisfy Rule 23(b)(3). 191 F.R.D. at 410. However, the

court in Rowe dismissed only the class action allegations of the complaint while

“stay[ing] the individual claims of the Plaintiffs . . . pending the outcome of

arbitration.” Id. at 419. Similarly, in Moscarelli, the court found securities fraud and

churning claims to be deficient under Rule 23 and ultimately granted a motion “to

dismiss the action as a class suit.” 288 F. Supp. at 463 (emphasis added). See also

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Souter v. Tatro, No. 03-CV-6141, 2004 WL 1574562, at *9 (W.D.N.Y. June 21,

2004) (“Plaintiffs’ proposed class action claims are dismissed, and this action is

stayed pending arbitration of plaintiffs’ remaining claims.”). Rowe and Moscarelli

demonstrate that failure to satisfy Rule 23 is grounds to dismiss claims on behalf of

a class. However, these cases do not support the proposition that failure to satisfy

Rule 23 automatically allows for the dismissal of individual claims. To the contrary,

claims that do not meet the required criteria for a class action may still be meritorious

if brought in an individual capacity. See In re “Agent Orange” Prod. Liab. Litig., 818

F.2d 194, 197 (2d Cir. 1987) (“The denial of class certification does not preclude

individual plaintiffs properly before the court frompressing their own claims.”). This

is borne out by the decisions in both Rowe and Moscarelli, where the courtstook care

to distinguish their treatment of the class claims and the individual claims.

At oral argument, Defendants suggested that the district court dismissed the

complaint because it did not contain any individual claims. Defendants also posited

that the court did not intend to dismiss Plaintiffs’ individual claims with prejudice

because “the order is very clear in that it only addresses the class action allegations

and the viability of any individual claims [is] not addressed in th[e] order.” 

Defendants suggested that McCrary could still file a demand to arbitrate his

individual claims. However, Defendants would not wholly commit to the position

that the district court’s order would have no res judicata effect on McCrary’s

individual claims, instead arguing that any res judicata effect ought to be determined

by an arbitration panel.

After carefully reviewing Plaintiffs’ complaint and the district court’s order,

we reject Defendants’ arguments. The complaint, while perhaps inartfully drafted,

distinctly makes out individual claims on behalf of both Thompson and McCrary. 

The complaint states that the churning, misrepresentation, and control liability

allegations are brought by “Thompson, McCrary, and other class members”; provides

the amount of damages allegedly suffered by Thompson and McCrary individually;

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and highlights the allegedly illegal trading activity in Thompson and McCrary’s

accounts. At various points, the complaint also discusses misrepresentations and

omissions made specifically to McCrary or Thompson. It is clear that the complaint

asserts both class claims and individual claims. The district court dismissed the entire

complaint with prejudice and drew no distinction between Plaintiffs’ individual

claims and the class claims. Whether the district court intended to or not, it dismissed

Plaintiffs’ individual claims with prejudice in its order. We acknowledge that

Plaintiffs could have brought the error to the district court’s attention in a postjudgment motion, which would have likely resolved the issue more expeditiously. 

Nevertheless, we find that the district court erred in dismissing Plaintiffs’ individual

securities fraud claims without either staying the claims pending arbitration or

undertaking an analysis of the claims under the PSLRA.

Finally, Defendants argue that any error by the district court was harmless

because: “Although not ruled upon by the district court, the Complaintfailsto comply

with the heightened pleading standards of the PSLRA, as it fails to plead a material

misrepresentation or omission in connection with the purchase or a sale of security,

and does not adequately plead a strong inference of scienter.” Defendants would

have this court review Plaintiffs’ complaint using the proper standard and find that

the dismissal of Plaintiffs’ individual claims was ultimately justified. It is true that

“[w]e may affirm the district court on any basis that is supported by the record,”

Dicken v. Ashcroft, 972 F.2d 231, 233 (8th Cir. 1992). However, where the district

court has erred procedurally and failed to decide the dispositive issues presented by

a motion to dismiss, this court has the discretion to remand or decide the issues. See

Singleton v. Wulff, 428 U.S. 106, 121 (1976) (“The matter of what questions may be

taken up and resolved for the first time on appeal is one left primarily to the discretion

of the courts of appeals, to be exercised on the facts of individual cases.”). Given the

complex procedural history of this case, we remand Plaintiffs’ individual claims for

the district court’s reconsideration. The district court is better placed to determine the

fate of Thompson’s individual claims now that his arbitration has been dismissed, and

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to determine whether McCrary’s individual claims should proceed in federal court,

be dismissed with or without prejudice, or be stayed pending arbitration. We 3

therefore reverse the district court’s order with respect to Plaintiffs’ individual claims

and remand these claims for further consideration.

B. Plaintiffs’ Class Claims

Plaintiffs argue that the court also erred in finding Plaintiffs’ claims ineligible

for class treatment. Plaintiffs assert that the issue of class certification may only be

addressed after a Rule 12(b)(6) analysis of Plaintiffs’ individual claims occurs. 

However, Plaintiffs cite no authority for this proposition, and we cannot find any

authority that requires a court to analyze the appropriateness of class treatment only

after the merits of the individual claims have been examined.

As discussed above, class claims that fail to meet the requirements of Rule 23

may be properly dismissed by granting a Rule 12(b)(6) motion. The court did not

perform the proper analysis under the PSLRA for Plaintiffs’ individual claims, but it

found that the individualized nature of the churning, unauthorized trading, and

misrepresentation claims rendered Plaintiffs’ class claims insufficient under Rule

23(b)(3). We agree with this conclusion. First, a churning claimrequiresthe plaintiff

to show “that the trading in his account was excessive in light of his investment

objectives” and that “the broker acted with . . . the wilful and reckless disregard for

the interests of his client.” Mihara v. Dean Witter & Co., 619 F.2d 814, 821 (9th Cir.

At oral argument, both McCrary and Defendants agreed that McCrary’s

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agreement with Stifel contained an arbitration clause. The parties disagreed,

however, as to whether Defendants had sought to compel arbitration. The only place

this issue is addressed in the record is in Defendants’ motion to dismiss, which notes

that “the claims are appropriately in arbitration or should be ordered to proceed in

arbitration.” Accordingly, we leave this issue for the district court to resolve on

remand.

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1980). Plaintiffs’ complaint alleges that Defendants’ trading activities were excessive

in light of Thompson’s age and in light of McCrary’s job losses and desire to pay for

his son’s college education. These are highly individualized claims that do not satisfy

the uniformity requirements of Rule 23(b)(3). Second, unauthorized trading claims

require a showing that the trades were in fact unauthorized and that Defendants

possessed the requisite scienter for each transaction. See Rowe, 191 F.R.D. at 414-

15. This showing is difficult to make without relying on highly individualized facts,

and Plaintiffs’ claims, with their focus on the trading activity in Thompson and

McCrary’s individual accounts, do not satisfyRule 23(b)(3)’s criteria for class action

claims. Finally, the complaint does not sufficiently allege materially uniform

misrepresentations and omissions that were made to all members of the class. 

Instead, the complaint focuses on omissions and misrepresentations that were made

to Thompson and McCrary and their individual reliance on those misrepresentations. 

For these reasons, the district court correctly determined that the complaint fails to

state viable class claims under Rule 23. We therefore affirm the district court’s order

as it applies to Plaintiffs’ class claims.

C. Thompson’s Arbitration

Plaintiffs’ brief raises a host of challenges to Thompson’s arbitration. First,

Plaintiffs argue that Defendants waived their right to arbitrate Thompson’s dispute

because of their “substantial participation” in this litigation. Usually, “[w]e review

de novo the legal determination of waiver but examine the factual findings underlying

that ruling for clear error.” Lewallen v. Green Tree Servicing, L.L.C., 487 F.3d 1085,

1090 (8th Cir. 2007). However, as Defendants correctly point out, the district court

never addressed whether Defendants waived their right to arbitrate because it

dismissed Plaintiffs’ claims on other grounds. “It would . . . be inappropriate for us

to examine the issue of waiver, which requires factual findings, when the district

court did not make such findings because it did not reach the question.” Bank of

Am., N.A. v. UMB Fin. Servs., 618 F.3d 906, 914 (8th Cir. 2010). We therefore

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leave this issue for the district court to resolve when it reconsiders Thompson’s

individual claims on remand.

Plaintiffs also argue that FINRA was automatically divested of jurisdiction

over Thompson’s claim once McCrary filed suit on behalf of a putative class. 

Plaintiffs rely on the FINRA Code of Arbitration Procedure (Customer Code),

specifically Rule 12204(d), which prohibits enforcement of an arbitration agreement

against a member of a certified or putative class action until the class is certified or

decertified, or until the member is excluded or withdraws from the class. Again, this

issue was not decided by the district court, and we therefore decline to address it.

Finally, Plaintiffs argue that the district court abused its discretion by denying

Plaintiffs’ request to enjoin Thompson’s arbitration. “We review the denial of a

preliminary injunction for abuse of discretion.” Roudachevski v. All-Am. Care

Cntrs., Inc., 648 F.3d 701, 705-06 (8th Cir. 2011). “An abuse of discretion occurs

where the district court rests its conclusion on clearly erroneous factual findings or

erroneous legal conclusions.” Lankford v. Sherman, 451 F.3d 496, 503-04 (8th Cir.

2006). In its order denying preliminary injunctive relief, the district court properly

applied the four-part Dataphase test, which weighs “(1) the threat of irreparable harm

to the movant; (2) the state of the balance between this harm and the injury that

granting the injunction will inflict on other parties litigant; (3) the probability that

movant will succeed on the merits; and (4) the public interest.” Dataphase, 640 F.2d

at 113. As the district court noted, “[o]ther than a conclusory statement that

Thompson would suffer irreparable harm, plaintiffs omit[ted] any discussion of the

relevant Dataphase factors.” The court also observed that “plaintiffs . . . failed to

provide any legal support for their request to stay the arbitration in light of

Thompson’s agreement to be bound by the panel’s decision.” Under the

circumstances, we cannot say that the district court abused its discretion in denying

Plaintiffs’ request for an injunction.

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III.

We affirm the district court’s refusal to enjoin Thompson’s arbitration and the

dismissal of Plaintiffs’ claims on behalf of a putative class. We reverse the dismissal

of Plaintiffs’ individual claims. The case is remanded to the district court for further

disposition according to the terms set forth herein.

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