FIL ED U.S. COURT OF APPEAL S EL EVENTHCI RCUI T MAR 25, 2010 J OHN L EY CL ERK [PUBLIS H] IN THE UN ITED STATES COURT OF APPEALS FOR THE ELE VENTH CIRCUIT

__ __ __ __ __ __ __ __ __ __ __ __ No. 0 7- 11 17 8

__ __ __ __ __ __ __ __ __ __ __ __ D.C. Dock etNo. 0 6- 80 65 2- CV-KLR SFM HOLDINGS, L TD., Pl ai nt iff -Ap pe ll an t, ve rs us BANC OF AMERI CA SECURITIES , LLC, Defen da nt -Ap pe ll ee.

__ __ __ __ __ __ __ __ __ __ __ __ App eal fro m

th e Uni te d S ta te s Di st ric t Co urt fo r th e So uthe rnDis tri ctof F lo rid a

__ __ __ __ __ __ __ __ __ __ __ __ _ (Ma rch 25 , 20 10 ) Befo re TJ OFLAT andCARNES, Ci rcu itJu dg es , andTHRASH, Dis tri ctJu dg e. * THRASH, Dis tri ctJu dg e:

Honora ble Thomas W. Thrash, United States District Judge for the N orthern D istrict of * Georg ia, sitting by

designation.SFM Hol di ng s, Lt d. ap pe al s the di sm is sa l wi th pre jud ic e o f it s co m

pl ai nt se ek in g d am ag es forbre ach of f iduc ia ry du ty andco ns tru ct iv e fraud . For the reas on s s etforth be lo w, we affi rm th e jud gm en t o f th e d is tri ctco urt. I. Fact s an d P ro cedur al His to ry App el la ntSFM Ho ld in gs , Ltd . (“ SFM ”) i s o ne of 1 78 in ve st or s d efraud ed in on e o f th e la rg es t s ecu rit ie s fr au d c as es inFlo rid a h is to ry . The p erp etrat or s, Jo hn Kim an d WonLee, op erat edas i nv es tm en t advi se rs us in g v ari ou s en ti ti es , in cl ud in g S ho rel an d Tra di ng . Dr. Salo m on Mel ge n i s the pre si de ntan d g en eral pa rtn er o f SFM . Jo hnKim co nv in cedDr. Mel ge n t o s etup a br ok erag e acc ou nt with B an c o f Am eri ca Se curit ie s, LLC. (Co m pl . ¶ 14 ). Dr. Mel ge n n ev er h adan y

1 di rectco nt actwith B an c o f Am eri ca Se cu rit ie s o r it s emplo y ees . Whe n t he acco un t was setup , Dr. Mel ge n c ed eda “ li m it ed ” p owe r of att orne y to tra de sec ur it ie s i n th e Ban c o f Am eri ca Se cu rit ie s p rime bro ke rag e acc ou nt . (Id. ¶¶14 -1 7) . Two of th e d oc um en ts co m

pl et edto op enth e acc ou ntwere the Pri m e Bro ke r Mar gi n Acco un t Ag reem en t (“ PB Ag reem en t” ) an d t he Ins ti tu ti on al Acco un t Ag reem en t (“ IA Agre em en t” ). The PB Agre em en t cl earl y an d p la in ly stat edth atBan c o f

Be cause the district court de cided this ca se on a motion to dismis s, we a ccept the 1 alleg ations pled in the complaint as true . Institut o De Pre vision Mil itar v. Mer rill Ly nch, 546 F.3d 1340, 1342 ( 11 Cir. 2008). t h 2Am eri ca Se cu rit ie s –refe rredto inth e ag reem en t as Bo fA – was no t an advi se r or

fiduc ia ry . Cu st om er ac kn owl ed ge s tha t n on e o f th e Bo fA Ent it ie s o r th ei r res pe ct iv e ag en ts or a ffi li at es is act in g a s a f iduc iary foror a n a dv is er to Cu st om er i n re sp ectof t hi s Ag reem en t o r an y tra ns act io n i t m ay un de rta ke with t he Bo fA Ent it ie s; Cu st om er und ers ta nd s tha t the Bo fA Ent it ie s ar e n otact in g a s i nv es tm en t advi se rs or s ol ic it in g or de rs , th atth e Bo fA Ent it ie s ar e n otadvi si ng it , per fo rm in g a ny an al y si s, o r m ak in g a ny j ud gm en t o n a ny m at te rs pe rta in in g t o t he su it ab il ity of a ny ord er, o r of

fer an y op in io n, ju dg m en t o r ot he r type of in fo rm at io n p ert ai ni ng to th e n atur e, va lu e, po te nt ia l, o r su it ab il ity of an y pa rti cu la r in ve st [m en t]. (Ap pe ll ee’s Br., Ex . A, ¶ 11 (b )). The IA Agre em en t es tabl is he d B an c o f Am eri ca Secu rit ie s as SFM’s “ ag en t fo r th e p ur po se s o f bu y in g a ndsel li ng sec ur it ie s.” (Ap pe ll ee’s Br., Ex . B, ¶ 3) . On Se pt em

be r 28 , 20 04 , SFM p ut$1 0 m il li onin to th e acc ountwith B an c o f Am eri ca Se cu rit ie s. So on th erea fte r an ot he r $2 .3 m il li on was p utin to th e acc ou nt . (Co m pl . ¶ 22 ). W ithi n am on th , SFM was lo si ng m on ey inth e acc ou nt , andDr. Mel ge n t ol d J oh n Ki m

th athe want edto clo se th e acc ou nt . (Id. ¶ 2 3) . In res po ns e, Kim

co nv in cedDr. Mel ge n t o l eav e h is m on ey inth e acc ou ntin ex ch an ge fora writ te n g ua ran te e o f hi s p rin ci pa l b y Kim an d S ho rel an d Tra di ng . (Id . ¶ 24 ). W on Lee was als o apa rtn er wi th Kim inSh or el an d. Th e co m

pl ai nt al le ge s tha t WonLee h adbe entra di ng ex te ns iv el y inSFM’s ac co un t. Sh ortl y

3th erea fte r, Lee at te m pt edto m ak e anil le ga l trad e -- s el li ng a la rg e am ou ntof s to ck sh ort wi th ou t arran gi ng to bo rro w th e st oc k fi rs t -- inth e acc ou nt . (Co m pl . ¶ 42 ). Upo n d is co ve rin g t he il le ga l trad e th e n ex t d ay , Ban c o f Am eri ca Se cu rit ie s or de redLee to co ve r th e sh ort s al e. The n ex t d ay , Kim or Lee rep eat edth e il le ga l sh ort s al e. Ban c o f Am eri ca Se cu rit ie s the n o rd eredLee to rem ov e al l o f hi s acco un ts (in cl ud in g S FM’s) fr om Ban c o f Am eri ca Se cu rit ie s. (Co m pl . ¶ 45 ). Nev erthe le ss , Ban c o f Am eri ca Se cu rit ie s p erm it te d Lee an d S ho rel an d t o trad e in th e acc ou ntform or e th anfou r week s. (Co m pl . ¶ 47 ). Acco rd in g t o the co m pl ai nt , Ban c o f Am eri ca Se cu rit ie s n ev er n ot ifi edDr. Mel ge n o f an y su sp ic io us tra di ng act iv ity inth e acc ou nt . (Co m

pl . ¶ 51 ). On No ve m

be r 2, 2 00 4, Ba nc of Am eri ca Se cu rit ie s re cei ve d alet te r si gn ed by Dr. Melg endi rect in g i t t o tran sf er SFM ’s ass et s t o S ho rel an d’s ac co un t. Dr. Mel ge n n ow cl ai m s tha t l et te r was a fo rg ery. On the same day , W on Lee wro te Ban c o f Am eri ca Se cu rit ie s co nf irming th athe wou ldacce ptSFM’s as se ts in to Sh or el an d’s ac co un t wi thBan c o f Am eri ca Se curit ie s. With in two week s, Sh or el an d t ran sf

erre d t he m on ey

to an ot he r co m

pa ny, W edbu sh Mo rg an Secu rit ie s, LLC. Thi s ac co un t was inth e n am e o f Sh or el an d o nl y . (Co m pl . ¶ 29 ). All of t he m on ey

was the n s to le n o r lo stindi sa st ro us tra di ng .

4SFM fil edth is act io n a ga in stBan c o f Am eri ca Se cu rit ie s, cl ai m in g d am ag es

du e to vi ol at io ns of f

ed eral an d s ta te sec ur it ie s l aws , bre ach of f iduc ia ry du ty, an d co ns tru ct iv e fraud . On the Defen dant ’s m ot io n, the di st ric t co urt d is m is se d t he 2 cl ai m s wi th pre

jud ic e. SFM app eal s the di sm is sa l o f th e b reac h o f fi du ci ary du ty an d c on st ru ct iv e fraudcla im s.

II. Ju ris di ct io n a ndSta nd ardof R ev ie w W e h av e juri sd ic ti on ov er the ap pe al s o f fi na l d eci si on s o f th e d is tri ctco urt pu rs ua ntto 28 U.S.C. § 1 29 1. We exe rci se de no vo rev ie w as t o t he di st ric t co urt’s d eci si on to gra nta m ot io n t o d is m is s. Ca ch iav. Is la m or ad a, 54 2 F .3d83 9, 84 1- 42 (11 Cir . 20 08 ). W e rev ie w th e d is tri ctco urt’s re fu sa l t o g ran t l eav e to

th
am en d fo r ab us e o f di sc ret io n, al th ou gh we ex erci se de no vo rev ie w as t o t he un de rlyin g l eg al co nc lu si onth atanam en dm en t t o t he co m pl ai ntwou ldbe fut il e. Harri s v . Iva x C or

p., 1 82 F.3d79 9, 8 02 (11 Cir . 19 99 ). th

SFM has filed suit in fede ral c ourt to rec over a ssets from Shoreland’ s Receive rship 2 Estate. That case is also before J udg e Ry skamp. See SFM Holding s, Ltd. v. J ohn Kim, Shoreland Tr ading , L L C, W on L ee, YungKim, and Guy L ewis, Esq. as Rec eiver

for Shore land Trading , L L C, Case No. 06-80801- RYSKAMP. Additi onally , SFM filed a state cour t action ag ainst J ohn Kim, Won L ee, Shore land, and B anc of Americ a Securities. 5III. Dis cu ss io n A. Fi rs t, SFM arg ue s tha t the di st ric t co urt erredinco nv ert in g the Defen da nt ’s Ru le 12 (b )(6 ) m ot io n t o d is m is s i nt o am ot io n fo r su m m ary jud gm en t wi th ou t gi vi ng no ti ce t o t he Pla in ti ff. Rea di ng th e Ord er o f th e d is tri ctco urt, i t i s cl ear th atth e co urt d idno t d o t ha t. The di st ric t co urt d id , ho wev er, co ns id er an d re ly up on th e PB Ag reem en t i n g ran ti ng th e Defen da nt ’s m ot io n t o d is m is s. Acco rd in g to SFM, co ns id erat io n o f th e d oc um en t co nv ert edth e Ru le 12 (b )(6 ) m ot io n t o di sm is s i nt o aRu le 56 m ot io n fo r su m m ary jud gm en t, wh ic h wo ul d h av e requi red no ti ce o f th e co nv ers io n t o the parti es . SFM cl ai m s i t was pre jud ic edby the lac k of no ti ce an d t he lac k o f op po rtu ni ty for d is co ve ry . The Defen da ntarg ue s tha t the di st ric t co urt’s co ns id erat io n o f th e PB Agr eem en t was pro pe r be cau se th e d oc um en t was in co rp or at edby referen ce i nt o th e co m pl ai ntan d t he do cu m en t was cen tra l t o t he Pla in ti ff’s cl ai m . In g en eral , if itco ns id ers m at eri al s o ut si de of t he co m pl ai nt , a di st ric t co urt m

us t co nv ertth e m ot io n t o d is m is s i nt o asu m m ary jud gm en t m ot io n. Se e Fed . R. Civ . P. 12 (b ). The re i s an ex cep ti on , ho wev er, t o t hi s g en eral rul e. Inrul in g upo n am ot io n t o di sm is s, the di st ric t co urt m ay co ns id er an ex tri ns ic do cu m en t i f itis (1) cen tra l t o th e p la in ti ff’s cl ai m , and(2) it s au th en ti ci ty is n otch al le ng ed . Day v. Taylor, 4 00 6F.3 d 1 27 2, 1 27 6 (1 1 Cir . 20 05 ); s ee al so Max ces s, In c. v. Lu cen t Tec hn ol og ie s, th In c., 43 3 F .3d13 37 , 13 40 (11 Cir . 20 05 ) (“ a d oc um en t o ut si de th e fo urco rn ers of th th e co m pl ai ntm ay

st il l b e co ns id eredif i t i s ce nt ral to th e p la in ti ff’s cl ai m s an d i s un di sp ut edinterm s o f au th en ti ci ty.”). SFM d oe s n otdi sp ut e th e au th en ti ci ty of th e PB Ag reem en t. Itdo es arg ue th atth e d oc um en t was no t i nc or po rat edby refe ren ce i nt o t he co m

pl ai ntan d t ha t, ev enif i t was , th e d oc um en t was no t ce nt ral to it s cl ai m s. Altho ug h t he PB Ag reem en t was no t at ta ch edto th e co m pl ai nt , th e co m pl ai ntno te d t ha t the bro ke rag e acc ou ntwas o pe ne d b y “ do cum en ts pro vi de d to Jo hn Kim

an d WonLee b y

Ban c o f Am eri ca Se cu rit ie s.” (C om pl . ¶ 18 ). Thes e do cu m en ts were re pe at ed ly des cri be d a s “ acco un t o pe ni ng do cum en ts .” (Id .) SFM do es no t d en y

th atth e PB Ag reem en t i s o ne of t he acco un t o pe ni ng do cu m en ts m en ti on edinth e co m pl ai nt . The Defe nd an t ar gu es th atth e ag reem en t was th e acc ou ntop en in g d oc um en t tha t es tabl is he d B an c o f Am eri ca Se cu rit ie s as a p rime bro ke r fo r SFM an d abs ol ve d B an c o f Am eri ca Se cu rit ie s fr om an y fiduc ia ry du ty as to th e acc ou nt . Accor di ng to SFM, an ot he r do cu m en t, the IA Agr eem en t, es tabl is he d B an c o f Am eri ca Se cu rit ie s as it s ex ecu ti ng bro ke r. Und er SFM ’s th eo ry , Ban c o f Am eri ca Se cu rit ie s’s ro le as a n e xe cu ti ng bro ke r im po se s up on ita fi du ci ary du ty. Howev er, the re i s n o d oubtth atth e PB Ag reem en t 7de te rm in edth e te rm s o f th e rel at io ns hi p b etweenSFM a ndBan c o f Am eri ca

Secu rit ie s. Th e ag reem en t s etforth th e “ te rm s an d c on di ti on s” on whi chBan c o f Am eri ca Se cu rit ie s wi ll “ op enan d m ai nt ai n a cco un ts foran d o th erwi se tra ns act bu si ne ss with t he cu st om er.... ” (App el le e’s Br., Ex. A at1). Fu rth er, t o t he ex te nt th atth e te rm s o f th e PB Ag reem en t co nf li ct edwith a no th er ag reem en t, i t s tate d th atitco nt ro ll edov er an y ot he r ag reem en ts be twee n B an c o f Am eri ca Se cu rit ie s an d i ts cu st om er. (Ap pe ll ee’s Br., Ex . A ¶ 20 ). W e h av e p rev io us ly hel d t ha t s uc h rel at io ns hi p- fo rm in g c on tra ct s ar e cen tra l t o apl ai nt iff’s cla im . Max ces s, 4 33 F.3 d a t 1 34 0 n .3. The di st ric t co urt d idno t err in co ns id eri ng th e PB Ag reem en t i n ru li ng on th e m ot io n t o d is m is s. Init s b rie fin g o n app eal , SFM re li es on th e o th er ac co un t o pe ni ng do cu m en t, the IA Agre em en t, t o a rg ue th atBan c o f Am eri ca Se cu rit ie s h ada fiduc ia ry du ty. Sp eci fic al ly, SFM arg ue s tha t s uc h adu ty w as est ab li sh edbe cau se th e IA Agr eem en t m ad e Ban c o f Am eri ca Se cu rit ie s i ts “ ag en t fo r th e p ur po se s o f bu y in g a ndsel li ng sec ur it ie s.” (Ap pe ll ee’s Br., Ex . B, ¶ 3) . The Defe nd an t ar gu es th atSFM n ev er re li edonth e IA Agr eem en t t o e st ab li shanag en cy inth e d is tri ct co urt p ro ceed in gs , andth atitcan no t d o s o n ow. See , e.g., Acce ss Now, In c. v. So ut hwe stAirl in es Co ., 38 5 F .3d13 24 , 13 31 (11 Cir . 20 04 ) (“ Thi s C ou rt h as th rep eat ed ly hel d t ha t an is su e n otrai se d i n t he di st ric t co urt an d ra is edforth e fi rs t 8ti m e in anap pe al wil l n otbe co ns id eredby thi s co urt.”) (ci ta ti on s o m it te d) . In thi s

cas e, SFM di d n otwaiv e th is arg um en t. Rat he r, itm ad e it s ag en cy arg um en t rel y in g o n the PB Ag reem en t, wh ic h t he Defen dantackno wled ge s “ co nt ai ne d ne arl y id en ti cal lan gu ag e.” (Ap pe ll ee’s Br. at35 , n.1 1) . Furt he r, th e IA Agr eem en t was alr eady

inth e rec or d, al be itforpu rp os es of o pp os in g t he Defen da nt ’s m ot io n t o t ran sf er v enue . SFM p utth e IA ag reem en t i n t he reco rd be fo re the di st ric t co urt, an d i t n ow as se rts th atth e IA ag reem en t i s o ne of t he acco un t o pe ni ng do cu m en ts , whi chare ce nt ral to it s cl ai m . Also , as we h av e al read y ex pl ai ne d, the PB Ag reem en t s et s the term s o f th e p art ie s’ rel at io ns hi p, ev enwhenco ns id eredalo ng si de of t he IA ag reem en t. Fo r th es e n arro w reas on s, an d fo r th e sa ke of c om

pl et en es s, we wi ll co ns id er tha t d oc um en t o n app eal alo ng with t he PB ag reem en t as on e o f th e acc ountop en in g d oc um en ts . B. SFM arg ue s tha t the di sm is sa l o f it s cl ai m s was im pr op er b ecau se itall eg ed th atBan c o f Am eri ca Se cu rit ie s was anex ecu ti ng bro ke r in ad di ti on to a pr im e br ok er. The Defen da ntdo es no t d en y th atitm ay

have be enbo th . “ Ban c o f Am eri ca Se cu rit ie s was en ga ge d a s a p rime andex ecu ti ng bro ke r.” (Ap pe ll ee’s Br. at14 ). Trad it io na ll y , exe cu ti ng bro ke rs (di st in ctfro m th e p rime bro ke r) t ak e, orex ecu te , tra de s i n d ire ctco m m un ic at io n wi th th e cu st om er. The pri m e b ro ke r’s 9ro le is us ua ll y min is te ria l -- itall ows th e cu st om er t o o pe n a n a cco un t wi th it , and al lo ws the ex ecu ti ng bro ke r to m ak e tr ad es forth e b en efi t o f th e cu st om er i n t he pr im e b ro ke r’s na m e. See Pr act ic in g Law In st itut e, The SEC Sp eak s i n 2 00 0: Mat eri al s Subm it te d b y

th e Div is io n o f In ve st m en t M an ag em en t, 1 16 9 P LI/C or p 38 3, 6 42 -4 3 (2 00 0 P ract ic in g Law In st itut e) (“ The cli en t o r it s fi du ci ary cl os es th e sh ort p os it io n b y

no ti fy in g [t he pri m e b ro ke r] tha t i t h as pl aceda co ve rin g tra ns act io n. Th e cl ie ntco ve rs th e tr an sa ct io n b y pu rch as in g s ecu rit ie s thr ou gh an ex ecu ti ng bro ke r who co nf irms th e tr ad e wit h [t he pri m e b ro ke r, who ] th encle ars an d s ettl es th e tr an sa ct io n.” ). Ban c o f Am eri ca Se curit ie s cl ai m s tha t “ [o ]ften , pr im e b ro ke rs ex ecu te tra ns act io ns as we ll .” (App el le e’s Br. at14 ). To cl ear up th is co nf us io n, Ba nc of Am eri ca Se curit ie s ar gu es th atitwas n otan“ in tro du ci ng br ok er.” Anin tro du ci ng bro ke r is us ua ll y th e o ne who advi se s the cu st om er an d ex erci se s d is cret io n o ve r it s p rime bro ke rag e acc ount . SFM do es no t s pe ci fic al ly alle ge th atBan c o f Am eri ca Se cu rit ie s ac te d a s anin tro du ci ng bro ke r. SFM d oe s ar gu e, ho wev er, tha t the term s “pr im e b ro ke r” an d “ cl eari ng bro ke r” ar e in te rch an ge ab le , bo th pe rfo rm in g m in is te ria l s erv ic es for ex ecu ti ng an d i nt ro du ci ng bro ke rs , res pe ct iv el y . Gener al ly, cl eari ng bro ke rs ex ecu te , cle ar, an d s et tl e tr ad es forth e in tro du ci ng bro ke rs who ha ve di rect rel at io ns hi ps with t he cli en t. Stua rt J . Kaswel l & Dani el e March es an i, Th e ABCs 10of

Bro ke r-Dea le r Reg ul at io n 2 00 7: Bro ke r-Dea le r Reg ul at io n -- An Ov erv ie w, 16 04 PLI/C or

p 9 , 12 (20 07 Prac ti ci ng Law Ins ti tu te ). Lik e p rime bro ke rs , cle ari ng br ok ers ord in ari ly owe no fiduc ia ry du ty to the cu st om ers of i nt ro du ci ng bro ke rs . Strat eg ic Inc om e Fu nd , LLC v. Sp ear, Lee ds & Kel lo gg Co rp ., 30 5 F .3d12 93 , 12 96 n.1 2 (1 1 Cir . 20 02 ).

th SFM su gg es ts th atBan c o f Am eri ca Se cu rit ie s’s ch arac te riz at io n o f it s ro le refl ect s a f

un da m en ta l m is un de rs ta nd in g o f tr ad it io na l p rime bro ke rag e arra ng em en ts . To res ol ve th is di sp ut e o ve r te rm in ol og y , we exa m in e a Sec ur it ie s

3
an d Ex ch an ge Co m

m is si on No-Ac ti on Lett er (“No- Acti on Lett er”) di sc us si ng th e na tu re o f th e p rime bro ke rag e in du st ry . See Pri m e Bro ke r Co m m it te e Reque st , SEC No -Act io n Let te r, 19 94 W L 80 84 41 (Ja nu ary 25 , 19 94 ). By it s t erm s, the PB Agr eem en t i s s ub

ject t o the No-Ac ti on Lett er. (Ap pe ll ee’s Br., Ex . A, ¶ 2). As de sc rib edinth e No- Acti on Lett er, the cu st om er, p rime bro ke r, an d e xe cu ti ng br ok er ar e typi cal ly “ di st in ctparti es .” (No- Acti on Lett er at*1 ). Usu al ly, “ th e ex ecu ti ng bro ke r ta ke s the ord er fro m th e cu st om er, y etth e p rime bro ke r typic al ly is su es th e co nf

irmatio n [o f th e o rd er].” (Id. at*5 ). Neve rth el es s, the No-Ac ti on Lett er d oe s p red ic t v ari at io ns on th is m od el . Som e b ro ke rs m ay act“ as ex ecu ti ng
It is worth noting that none of the pre cede nts that the Plainti ff c ites for the pr oposition 3 that prime and e x ecutingbroker s are sy nony mous with clearing

and introducingbroker s, respe ctively , mention prime broker s. 11br ok ers who cle ar p rime bro ke r tr an sa ct io ns .” (Id . at * 7) . And , “ th e cl eari ng firm

of anin tro du ci ng bro ke r act in g a s an ex ecu ti ng bro ke r” m us t ex ecu te a pr im e br ok erag e co nt ractli st in g t he res po ns ib il it ie s o f th e p art ie s. (Id . at * 8) . Mor eo ve r, th e No- Acti on Lett er co nt em pl at es a di st in ct io n b etweenanex ecu ti ng bro ke r an d anin tro du ci ng bro ke r. (Id . at * 8) (“ Incas es in vo lv in g i nt ro du ci ng bro ke r-d eal ers who actas e xe cu ti ng bro ke rs , th e ex ecu ti ng bro ke r m us t i nf orm eachbro ke r-d eal er cl eari ng it s tran sa ct io ns th atitin te nd s t o a ctas a n e xe cu ti ng bro ke r.”). The se di st in ct io ns m ay

ha ve si gn ifi can ce i n t he reg ul at ory co nt ex t tha t ar e ab se nthe re. Whe th er Ba nc of Am eri ca Se cu rit ie s h ada fi du ci ary du ty to SF M i s de te rm in edby the subs ta nt iv e ag reem en t o f th e p art ie s. Itis no t d et erm in edby labe ls pl acedon th e rel at io ns hi p. Ki m , Lee an d S ho rel an d a ct edas S FM’s in ve st m en t ad vi so r. Kim ex erci se d d is cret io nary

co ntro l o ve r th e acc ou nt acco rd in g t o t he all eg at io ns of t he co m pl ai nt . The PB Agre em en t ex pl ic it ly stat ed th e Ban c o f Am eri ca Se cu rit ie s was no t ac ti ng as a n a dv is er o r fi du ci ary to th e cu st om er. Itha d n o d ire ctco nt actwith S FM. Giv enth is rel at io ns hi p, the fiduc iary is th e p arty

who ha s d ire ctco nt actwith a ndpro vi de s i nv es tm en t ad vi ce t o the cu st om er. See McDan ie l v . Bear S te arn s & Co ., 19 6 F . Sup p. 2 d 3 43 , 35 3 (S.D.N.Y. 20 02 ) (cl eari ng firm s o nl y li ab le when th ey

be co m e “ act iv el y

an d di rect ly inv ol ve d i n t he in tro du ct ory bro ke r’s act io ns ” an d n otwhen pe rfo rm in g 12m ere “ ro ut in e cl eari ng fun ct io ns .”). Eve n i f Ban c o f Am eri ca Se cu rit ie s ac tu al ly

se rv edas t he pri m e an d e xe cu ti ng bro ke r, “ [i]n n o way, shape or f orm do es th e co m pl ai ntpl eadth at[Ban c o f Am eri ca Se cu rit ie s] was m ak in g d eci si on s re ga rd in g th e acc ou nt s [b utrathe r] sim pl y ex ecu te d t he [SFM ] trans act io ns alo ng with t he ot he r tr an sa ct io ns sen t t o i t b y [Kim ]. ” Dil lo n v . Mil it an o, 7 31 F. Sup p. 6 34 , 63 6 (S.D.N.Y. 19 90 ). SFM arg ue s tha t the IA Agre em en t cr eat eda fi du ci ary du ty w ith t hi s la ng ua ge : “ Cl ie ntap po in ts Ban c o f Am eri ca Se cu rit ie s as it s ag en t fo r th e pu rp os es of b uyin g a ndsel li ng sec ur it ie s i n i ts Cas h Acc ou nt .” (App el le e’s Br., Ex. B, ¶ 3 ). As p artof t ha t ag en cy , th e ag reem en t au th or iz edBan c o f Am eri ca Secu rit ie s t o “ actup on cli en t’s i ns tru ct io ns or t ho se of i ts att orne y -in -fac t.” (I d.) Und er SFM ’s th eo ry , th atag en cy crea te d afiduc ia ry

du ty, ev enth ou gh th e sa m e pr ov is io n i n t he ag reem en t s ta te s tha t Ba nc of Am eri ca Se cu rit ie s “ sh al l i nc urno li ab il ity inact in g upo n a ny suc h i ns tru ct io ns . . . pr ov id edsu chin st ru ct io ns reas on ab ly app ear g enui ne to Ban c o f Am eri ca Se cu rit ie s.” (I d.) Th e IA Agr eem en t, s ta nd in g a lo ne , di d n otcrea te a fi du ci ary du ty of Ban c o f Am eri ca Secu rit ie s t o S FM. See Lim baug h v . Merr il l Lync h, Pi erce , Fen ne r & Sm ith, 7 32 F.2 d 8 59 , 86 2 (1 1 Cir . 19 84 ) (n o l iabi li ty whe re b ro ke r di sc harg edit s l im it ed th du ty of ex ecu ti ng st oc k o rd ers ). Any act io ns Ban c o f Am eri ca Se cu rit ie s 13pe rfo rm edat t he be he stof Ki m were au th or iz edby the IA Agre em en t. Fu rth er, ev ensupp os in g tha t WonLee fo rg eda le tt er t o t ran sf er Dr. Me lg en ’s fun ds in to Sh or el an d’s ac co un t (t hi s i s d is pu te d) , th e ag reem en t au th or iz edBan c o f Am eri ca Secu rit ie s t o a ctup on an y cli en t i ns tru ct io ns th at“ reas on ab ly app ear[ ed ] ge nu in e.” (Id .) Ther efo re, Ban c o f Am eri ca Se cu rit ie s’s ac ti on s wer e ap pr op ria te withi n t he li mit edag en cy

crea te d b y

th e IA Agr eem en t. Si gn ifi can tl y , th e ag reem en t pr ov id edth atBan c o f Am eri ca Se cu rit ie s co ul d a ccep t “ witho utan y in qu iry or in ve st ig at io n b y

Ban c o f Am eri ca Se cu rit ie s ... an y othe r in stru ct io ns co nc ern in g sa idAcco un t” fro m

anin tro du ci ng bro ke r. (App el le e’s Br., Ex. B, ¶ 2 7) . SFM arg ue s tha t Sh or el an d was no t an in tro du ci ng bro ke r in th is rel at io ns hi p, b uton ly a m ere a dv is er. The arg um en t m us t fa il . Firs t, Sh or el an d was reg is te redas abro ke r-d eal er wi th th e Sec ur it ie s an d Ex ch an ge Co m m is si on un ti l i ts reg is tra ti on was re vo ke d i n 2 00 7. Sh or el an d Tra di ng , LLC, 24 S.E.C. Rel eas e No. 5 56 88 , 20 07 WL 12 85 75 4 (M ay 1, 2 00 7) . Furt he r, th e IA Agr eem en t de fin es anin tro du ci ng bro ke r as “ an ot he r br ok er thr ou gh who se co urte sy Clie nt ’s Acco un t h as be enin tro du ced .” (App el le e’s Br., Ex. B, ¶ 2 7) . There is no di sp ut e th atSh or el an d (a ct in g t hr ou gh it s re pr es en tati ve s) setup th e p rime bro ke rag e acco un t. Sh or el an d was act in g a s an in tro du ci ng bro ke r fo r SFM . Fin al ly, th e co m pl ai ntackno wled ge s tha t Lee co nt ro ll edSh or el an d Tra di ng . (Co m pl . ¶ 12 ). 14Para gr ap h 2 7 o f th e IA Agr eem en t ab so lv es Ban c o f Am eri ca Se cu rit ie s o f li ab il ity

fo r th e act s an d o mis si on s o f th e in tro du ci ng bro ke r’s of fic ers , em pl oyees, o r ag en ts . (App el le e’s Br., Ex. B, ¶ 2 7) . Ban c o f Am eri ca Se cu rit ie s p erfo rm edto th e ex te ntof t he ag en cy

create d i n t he IA Agre em en t. The co m pl ai ntdo es no t al le ge th atBan c o f Am eri ca Se cu rit ie s fa il edto set tl e an d c le ar al l trad es . SFM’s br each of f

iduc ia ry du ty andco ns tru ct io n fr au d c la im s wer e p ro pe rly dis m is se d. W e al so fin d t ha t the di stric t co urt d idno t ab us e it s d is cret io n i n d is m is si ng th e co m pl ai ntwith p reju di ce. Init s b rie fin g o n app eal , SFM s eek s l eav e to am en d be cau se th e fac tu al all eg at io ns co ul d s up po rt abre achof c on tra ctcla im . Howev er, as di sc us se d abo ve , Ban c o f Am eri ca Se curit ie s ac te d p ur su an t t o t he IA Agr eem en t an d the PB Ag reem en t. Ban c o f Am eri ca Se cu rit ie s’s co m pl ia nc e wit h it s o bl ig at io ns un de r th os e d oc um en ts pre cl ud es li ab il ity forbre ach of c on tra ct . The refo re, the su gg es te d am en dm en t wo ul d b e fu ti le . IV. Con cl us io n Fo r th e rea so ns setforthab ov e, th e jud gm en t o f th e d is tri ctco urt i s AFFIRMED.

15TJOFLAT, Cir cu itJu dg e, co nc urrin g s pe ci al ly:

I co nc urinth e co urt’s jud gm en t. I wri te sep arat el y be cau se I be li ev e th at th e d is tri ctco urt’s jud gm en t s ho ul d b e affi rm edona m or e li m it edba si s tha n t he on e th e co urt t ak es . The cen tra l que st io n i n t hi s ap pe al is whet he r SFM Hol di ng s, Lt d. (“ SFM ”) ha s s uf fic ie nt ly ple d tha t Banc of Am eri ca Se cu rit ie s (“ BAS”) owedSFM t he fiduc ia ry du ty to s up erv is e th os e p ur po rti ng to tra de on it s b eh al f. To m e, th e an swe r is no . The p art ie s’ con tra ct s p la in ly precl ud e th e arg um en t tha t BAS owed SFM th e fi du ci ary du ty alle ge d. I wri te sep arat el y be cau se I be li ev e th atth ere i s no ne edto go be y on d the co nt ractua l l an gu ag e an d the all eg at io ns inth e co m pl ai nt to affi rm th e d is tri ctco urt’s jud gm en t. As the co urt co rrec tl y

no te s, the ex is te nc e an d s co pe of afiduc iary du ty is de te rm in edby the rel at io ns hi p b etweenpa rti es . See g en eral ly, e.g ., Pres s v . Ch em . Inv . Serv s. Co rp ., 16 6 F .3d52 9, 5 36 (2dCir . 19 99 ) (“ Si m pl y pu t, the fiduc ia ry ob li ga ti on th atari se s b etweena br ok er an d acu st om er . . . is li m it edto m at te rs rel ev an t t o a ffai rs en tru st edto th e b ro ke r.”) (i nt ern al qu ot at io n a ndcit at io n om itte d) ; Ward v . Atl . Sec. Bank , 77 7 S o. 2 d 1 14 4, 1 14 7 (F la . 3dDis t. Ct . App . 20 01 ) (ex am in in g t he “ fact s an d c irc um st an ces ” o f th e p art ie s’ rel at io ns hi p t o de te rm in e th e ex is te nc e o f a fi du ci ary du ty). Andwher e, as he re, the rel at io ns hi p 16is est ab li sh edby con tra ct , th e ex is te nc e an d s co pe of afiduc ia ry du ty m ay be as cert ai ne d b y

ex am in in g t he co nt ractua l t erm s. See Ch ip se r v. Ko hl m ey er & C o., 60 0 F .2d10 61 , 10 66 –6 7 (5 th Cir . 19 79 ). 1 The ag reem en t b etweenSFM a ndBAS d em on st rat es th atBAS d idno t h av e th e fi du ci ary du ty alle ge d i n the co m pl ai nt . There fo re, the re i s n o n eedto de lv e in to a di sc us si on ab ou t the ge ne ral rol es of p rime, execu ti ng , in tro du ci ng , and cl eari ng bro ke rs . Wha te ve r fi du ci ary ob li ga ti on s the y m ay typic al ly tak e o n i n t he ab st ract , BAS di d n otass um e th os e al le ge d h ere. The co m pl ai ntall eg es BAS o wedSFM t he fiduc ia ry du ty to s up erv is e th ird pa rti es tra di ng an d m an ag in g i ts acco un t inord er t o p rev en t Lee an d S ho rel an d 2 fro m m ak in g u naut ho riz edtra di ng de ci si on s i n the SFM a cco un t; to no ti fy SFM th atLee an d S ho rel an d h adm ad e tr ad es itcla im s wer e m ad e wit ho utit s co ns en t; to no ti fy SFM tha t i t d eem edth os e m an ag in g t he acco un t “ un tru st worth y ”; to no ti fy SFM t ha t i t o rd eredLee to rem ov e al l ac co un ts he m an ag ed —i nc lu di ng th e SFM acco un t— ou t o f BAS; an d t o t ak e due care to co nf irm th e au th en ti ci ty of th e fo rg edtra ns fer l et te r be fo re tran sf erri ng ass et s fr om

th e SFM acco un t.
In Bonne r v. City

of Prichar d, 661 F.2d 1206, 1209 ( 11th Cir. 1981) (en ba nc), this 1 court a dopted as bindingprec edent a ll decisions of the for mer F ifth Circuit handed down prior to October 1, 1981. It is undisput ed that Kim, L ee, or Shoreland we re dire ctly

responsible for

the trading 2 activity and asse t transfe r discussed in the c omplaint. 17The p art ie s’ agr eem en t de m on st rat es th atsupe rv is in g fo r SFM th ird 3 pa rti es m an ag in g i ts acco un t was no t a f iduc ia ry du ty entru st edto BAS. In de ed , th ei r ag reem en t ex pr es sl y pro vi de s tha t i t was no t. The PB Ag reem en t p la in ly stat es th atBAS wou ldno t ac t as a fi du ci ary: [BAS] are n otAdv is or s o f Fi du ci ari es :

. . . . Cu st om er ac kn owl ed ge s tha t n on e o f th e Bo fA Ent it ie s o r th ei r res pe ct iv e ag en ts or a ffi li at es is act in g a s a f iduc iary foror a n advi so r to Cu st om er i n re sp ectof t hi s Ag reem en t o r an y tra ns act io n i t m ay

un de rta ke with B of

A Ent it ie s; Cu st om er un de rs ta nd s tha t the Bo fA Ent it ie s ar e n otact in g a s i nv es tm en t advi se rs or s ol ic it in g o rd ers , th atth e Bo fA Ent it ie s ar e n ot advi si ng it , per fo rm in g a ny anal y si s, o r m ak in g a ny j ud gm en t on an y m at te rs pe rta in in g t o t he su it ab il ity of any ord er, o r of fer any op in io n, ju dg m en t o r othe r type o f in fo rm at io n pe rta in in g t o the na tu re, v al ue , po te nt ia l o r su it ab il ity of a ny pa rti cu la r in ve st . (Ap pe ll ee’s Br., Ex . A, ¶ 11 ) Wha t i s m or e, th e PB Ag reem en t an ti ci pa te s tha t the cu st om er m ay ut il iz e th irdparti es to tra de inor m an ag e th e cu st om er’s acc ountan d m ak es cle ar tha t BAS wo ul d n otsupe rv is e o r pa ss jud gm en t o n s uc h p art ie s’ act io ns forth e

Iuse the ter

m agree ment to refe r collec tively , unless otherwise indicated, to the 3 agree ments ref

err ed to in the complaint and attached to B AS’s motion to di smiss and SFM’s response to that motion, i .e., the Prime B roker Marg in Account Agree ment (“PB Agree ment”) and the Institut ional Acc ount Agree ment (“I A Agree ment”), r espec tively . 18cu st om er. Fo r ex am pl e, th e PB Ag reem en t p ro vi de s tha t SF M m ay ut il iz e o th er br ok ers , kn own as e xe cu ti ng bro ke rs , to pl ace o rd ers , inwhi chcas e BAS wo ul d actas S FM’s p rime bro ke r. (Id . ¶ 3.) Th e PB Ag reem en t al so ackno wled ge s tha t SFM m ay pe rm itan ot he r type o f th irdpa rty (th e “ Adv is or ”) t o h av e d is cret io na ry m an ag em en t au th or ity

ov er the acco un t. (Se e, e.g ., id . ¶¶ 3( d) , 10 (b ).) Und er the PB Ag reem en t, wh enth irdpa rti es tra de inor m an ag e th e acc ou nt , th ey are ac ti ng onbe ha lf o f th e cu st om er an d n otas a n a ge ntof B AS. Add it io na ll y , as the PB Ag reem en t ex pl ai ns , BAS wil l n otsupe rv is e o r ot he rwis e pr ov id e advi ce t o the cu st om er re gard in g d eci si on s m ad e b y th es e th irdpa rti es . Fo r ex ecu ti ng bro ke rs , th e PB Ag reem en t s ta te s: As b etweenCu st om er an d B AS, th e Exe cu ti ng Bro ke r wil l b e act in g as anag en t o f Cu st om er fo r th e p ur po se of c arrying ou t Cu st om er’s in st ru ct io ns with re sp ectto th e p ur ch as e, sa le an d s et tl em en t o f se cu rit ie s. Cu st om er und ers ta nd s tha t n o o rd er m ay be leg al ly acce pt edby BAS as Pri m e Bro ke r fro m anExec ut in g B ro ke r with who m BAS h as no t en te redin to a Pri m e Bro ke rag e Agr eem en t. (Id . ¶ 3(a ).) The PB Agre em en t co ns is te nt ly m ai nt ai ns th ata th irdpa rty m ak in g

4 de ci si on s fo r a cu st om er’s acc ou ntwil l n otbe supe rv is edby BAS for the SFM argues that B AS had the fiduc iary duty alleg ed in the complaint bec ause the re is 4 no Prime Br okera g e Agree ment in the rec ord that B AS entere d into with Kim, L ee, or Shoreland. This argument is without m erit. The PB Agree ment provides that B AS will not be supervising any third parties—not only

executing br okers— tra ding or manag ing a

n acc ount on a customer’ s behalf . The que stion of whether the third party

is an executingbroker

or some other

third-par ty advisor is ac cording ly

irrele vant to the question of whe ther B AS had the alleg ed fiduc iary duty to supervise. 19cu st om er. Itfurth er p ro vi de s tha t “ [t]he Bo fA Ent it ie s s ha ll no t b e h el d l iabl e fo r

an y act s o r omiss io ns of a n Ex ecu ti ng Bro ke r, subc us to di anor o th er thi rdpa rty. All tra ns act io ns effe ct edwith a n Ex ecu ti ng Bro ke r orot he r th irdpa rty for Cu st om er s ha ll be forth e acc ou ntof C us to m er an d t he Bo fA Ent it ie s s ha ll ha ve no res po ns ib il ity

to Cu st om er o r su chth irdpa rty with res pe ctth eret o,” (id . ¶ 10 (b )), an d B AS wou ld“ rel y

up on an y au th or iz edin st ru ct io ns . . . whi ch[BAS] reas on ab ly bel iv e[s ] to be ge nu in e an d t ran sm it te d b y au th or iz edpe rs on s.” ( Id . ¶ 10 (f).) The re i s n ot hi ng inth e p art ie s’ agr eem en t t o s ug ge stth atBAS o wedth e fiduc ia ry du ty alle ge d i n t he co m

pl ai nt . Ins te ad , as e xp la in edab ov e, th e

5 ag reem en t p ro vi de s the op po si te . It s ta te s tha t BAS wou ldno t b e act in g a s a fiduc ia ry an d wo ul d n otsupe rv is e, fo r th e cu st om er, thi rdparti es m ak in g d eci si on s fo r th e cu st om er’s acc ou nt . No al le ga ti oninth e co m

pl ai ntis su ffi ci en t t o e st ab li sh th e al le ge d fi du ci ary du ty in s pi te of t he pa rti es ’ ag reem en t. SFM ha s n otall eg edth atBAS in factto ok

The IA Agree ment languag e stating“Client appoints BAS as its ag ent for the purposes 5 of buying a

nd selling se curities in its Cash Account” does not cha ng e this conclusion. (Appe llee’s B r., Ex. B, ¶ 3.) First, it is not clear that this provisi on is even a pplicable be cause SFM’s alleg ations relateto trades a nd transfe rs made in a

Prime Br oker Ma

rg in Account r ather than a Cash Ac count. B ut critically , SFM does not claim that B AS failed to buy or sell sec urities consistent with its i nstructions. It claims that BAS should havepreve nted others pur portedly tradingon its behalf fr om making c erta in decisions. 20on a supe rv is ory rol e in hand li ng it s ac co un t. Itha s n otall eg edth atBAS ag reed to do an yth in g m or e th anwhatth e ag reem en t p ro vi de d. In de ed , th e o pp os it e is tru e. The c om

pl ai ntst at es th atBAS n ev er s po ke or h adan y in te ract io n wi th SFM an d M el ge n. No r do es m ere kno wled ge ab ou t Ki m , Lee, an d S ho rel an d’s ac ti on s crea te a fi du ci ary du ty whe re n on e o th erwi se ex is te d. Se e Mc Dan ie l v . Bear St earn s & Co ., Inc ., 19 6 F . Sup p. 2 d 3 43 , 35 2– 53 (S.D.N.Y. 20 02 ) (ex pl ai ni ng th at m ere kno wled ge of f

rau d b y anin tro du ci ng bro ke r do es no t cr eat e fi du ci ary ob li ga ti on s fo r a cl eari ng bro ke r). Fi na ll y , th e al le ga ti on th atBAS was an“ ex ecu ti ng bro ke r” i s i ns uf fic ie ntto crea te th e fi du ci ary du ty alle ge d. Th is term , as SF M u se s i t i n t he co m pl ai nt , is
m ean in gl es s. Itdo es no t t el l u s an yth in g abo utBAS. It d oe s n ottel l u s tha t BAS ha d a ny add it io na l re sp on si bi li ti es or p erfo rm edany rol e n otco nt em

pl at edby the pa rti es ’ ag reem en t i n c on ne ct io n wi thKim , Lee, an d S ho rel an d’s ac ti vi ti es . Cri ti cal ly, itdo es no t t el l u s tha t BAS ha d afiduc ia ry ob li ga ti on to supe rv is e, fo r SFM , th irdpa rti es m an ag in g the SFM a cco un t. The pa rti es ’ di sa gr eem en t o ve r whe th er a “pr im e b ro ke r” o r an“ ex ecu ti ng bro ke r” i s l ik e an“ in tro du ci ng bro ke r” ora “ cl eari ng bro ke r” i s a r edhe rri ng . No fi du ci ary du ty exi st edbe cau se SFM an d B AS ag reedth atth ere wo ul d b e n on e.

21