Opinion ID: 733378
Heading Depth: 2
Heading Rank: 2

Heading: The Compensatory Damages Claim.

Text: 19 BHC includes in its briefs a lucid account of how order flow payments originate and operate. BHC describes itself as a clearing broker whose role is to settle[ ] and clear[ ] trades and perform[ ] certain administrative and custodial functions for so-called introducing brokers (or retail brokers), who deal with individual public customers and take securities orders from them. See generally Stander v. Financial Clearing & Servs. Corp., 730 F.Supp. 1282, 1285 (S.D.N.Y.1990) (describing different functions of clearing and introducing brokers); Katz v. Financial Clearing & Servs. Corp., 794 F.Supp. 88, 90 (S.D.N.Y.1992) (same). BHC is thus a middleman, receiving customer orders from introducing or retail brokers, and transferring those orders to market makers or exchange specialists, who make their living by actually executing the customers' transactions in various securities markets. Order flow payments are one means by which the market makers compete with one another for the flow of customer orders from the introducing and clearing brokers. Market makers offer brokers cash and non-cash incentives--such as market research or reduced service charges or clearing charges--in exchange for the brokers having directed a volume of orders to the market makers. This incentive system is called payment for order flow. 5 20 The connection between payments made to brokers for order flow and the individual customer orders that helped generate the payments is somewhat attenuated. First, market makers customarily compensate brokers only periodically--monthly or quarterly--and the amount of the payment is based upon the total volume of trades executed during that period. Second, order flow payments ordinarily are made only to brokers that have provided the market makers with a certain threshold number of (relatively small volume) orders per period, typically a minimum of 100,000 shares compiled from trades involving 3,000 or fewer shares each. Joint Appendix at 56; Report of the Payment for Order Flow Comm. of the Nat'l Ass'n of Sec. Dealers, Inc., Inducements for Order Flow, at 15-16 (July 1991). Thus, the individual, low-volume trades of a single customer cannot be said to generate order flow payments to the brokers. Moreover, because brokers usually receive order flow payments only at the end of a period, it is probably impossible to match particular payments with particular retail trades. 6 21 For these reasons, BHC argues that the class members jointly seek the benefits that accrued to BHC from [ ] aggregated order flow. Appellee's Brief at 19. According to BHC, therefore, the amount in controversy is based on a common right in which each putative class member has a common and undivided interest. Id. We are presented with a close question, tenaciously argued on both sides, but ultimately we disagree with BHC's analysis and conclude that the plaintiffs' claims to BHC's order flow payments are separate and distinct and cannot be aggregated to satisfy the amount in controversy. 22 Because the class members in this case do not in any sense possess joint ownership of, or an undivided interest in, a common res, their claims based on order flow payments are separate and distinct. Plaintiffs in paradigm common fund cases assert claims to a piece of land, a trust fund, an estate, an insurance policy, a lien, or an item of collateral, which they claim as common owners or in which they share a common interest arising under a single title or right. Gilman and his putative class have no joint interest other than a shared appetite for a money judgment payable by a single defendant--which is not the type of common and undivided interest that warrants an exception to the rule against aggregating claims. Under the rule of Snyder, Zahn, and the other cases cited herein, the plaintiffs' claims should have been dismissed for failure to satisfy the requisite amount in controversy. 23
24 BHC's primary argument emphasizes that order flow payments depend on the aggregate volume of trading orders provided to market makers and cannot be traced to specific orders placed by individual investors. Therefore, BHC asserts, the claim here is based on a common right in which each class member has a common and undivided interest; and because the claim seeks to capture the benefits that accrued to BHC from the aggregation of customer orders, the entire amount of the order flow payments should be considered in the aggregate for purposes of determining the amount in controversy. We disagree. 25 All of BHC's customers allegedly suffered similar losses due to BHC's handling of their securities trades; nonetheless, though their claims are asserted together in a class action, the plaintiffs never possessed anything in common prior to the litigation. The only right or title allegedly held by the customers is the right to sue BHC for the undisclosed extracontractual benefit that BHC derived from their securities trades; that right is distinct to each plaintiff, and is based on BHC's handling of that person's separate transactions. Had this case proceeded to the stage of class certification in either the state or federal court, it seems clear that each class member would have had the right to opt out of the class. 7 The facts that BHC pooled the plaintiffs' trading orders to receive benefits, and that the market makers conferred such benefits on the basis of the monthly volume of orders that they received, does not mean that the plaintiffs held joint title to the total volume of their orders or to the aggregate of the allegedly wrongful order flow payments generated by such volume. See Dumont v. Charles Schwab & Co., Inc., Civ. A. No. 95-0606, 1995 WL 262262, at  5 (E.D.La. May 4, 1995) (The fact that the order flow payment was in a lump sum is irrelevant--each of the plaintiff's claims [is] separate and distinct and based upon their own individual stock transactions through Schwab.). 8 26 The complaint alleges that BHC breached contractual and fiduciary duties to its customers by accepting the payment of cash ... in return for BHC executing the customer's order with [a] market maker.... [W]hen the plaintiff, or another class member, would execute an order[,] ... BHC would retain [an order flow payment] for its own benefit and not that of its customer. Joint Appendix at 12-13 (emphasis added). 9 On the face of the complaint, therefore, the plaintiffs' suit alleges that BHC's receipt of order flow payments harmed each individual customer in the conduct of that customer's individual securities transactions. Not coincidentally, the SEC regulations requiring disclosure of order flow payments compel brokers to disclose to their customers (in confirmation of securities transactions) not only whether payment for order flow is received by the broker or dealer for transactions in [that type of] securities, 17 C.F.R. § 240.10b-10(a)(7)(iii), but also--upon an individual customer's written demand--the source and nature of the payment for order flow [that is] received in connection with the particular transaction  of that individual customer. Payment for Order Flow, SEC Release No. 34-34902, 59 Fed.Reg. 55,006, 55,010 (Nov. 2, 1994) (emphasis added). 27 In short, although the class action device allows the plaintiffs to combine their claims for convenience, neither that form of action nor the nature of order flow payments permits the aggregation of the plaintiffs' separate and distinct claims so as to satisfy the amount in controversy. 28
29 BHC's second major argument in support of federal jurisdiction is that the class members have a common and undivided interest in recovering from a fund, and that the total value of that fund should be used to determine whether the jurisdictional minimum has been reached. BHC bases this argument on its assertion that the plaintiffs seek[ ] disgorgement of all benefits of payments for order flow received by BHC, whether identifiable to a particular transaction or not. Appellee's Brief at 17 (emphasis in original). Because this right to disgorgement (BHC contends) necessarily depends on the theory that BHC breached a fiduciary duty to the class as a whole, the object of the plaintiffs' suit can only be to share in the[ ] fruits [of BHC's breach] based on the total amount of disgorgement, and not on the basis of individual plaintiffs' trades with BHC. Id. at 22 (emphasis added). BHC thus concludes that the claims to recover its order flow payments are held jointly by the plaintiffs, and the entire amount of the benefits ... [should] be considered for jurisdictional purposes. Id. at 17. 30 Preliminarily, BHC's reading of the complaint overstates the contentions and goals of the class. The complaint (1) alleges that plaintiff and the other members of the class are entitled to recover any monies paid as kickbacks or commercial bribes to BHC on customer transactions; and (2) seeks a judgment [r]equiring ... BHC to pay to plaintiff and the members of the class the amount of kickbacks and other inducements received from market makers for the execution of customer orders. Joint Appendix at 16, 20. While BHC views these passages as a specific claim that BHC disgorge all order flow payments that it received for all of its customer transactions, whether identifiable to a particular transaction or not, Appellee's Brief at 17, 19, we think this reading adds considerable gloss. The quoted sections of the complaint are not at all inconsistent with a collective demand by the class members for the disgorgement of order flow payments received in respect of their individual transactions, as accurately as that amount can be calculated. 10 31 Even if BHC's reading of the complaint were sound, the plaintiffs' claims still cannot be aggregated because the class members have no common and undivided interest in the fund of damages that they might receive. BHC's argument to the contrary rests almost entirely on the First Circuit's opinion in Berman v. Narragansett Racing Ass'n, 414 F.2d 311 (1st Cir.1969), which we think is inapposite. In Berman, a group of racehorse owners filed class actions to collect prize money allegedly owed to them by three race tracks under similar purse agreements. 414 F.2d at 312. The substantive issue was whether the race tracks, which had paid the winning horse owners 44.7% of the track's ticket sales proceeds, also owed them 44.7% of what the tracks took in as breakage--the small change that the tracks pocketed after rounding their bettors' payouts down to the lowest dime. Id. at 313. Reversing prior dismissals for lack of jurisdiction, the First Circuit held that the amount in controversy was the total amount of breakage sought by the plaintiffs as prize money, and not each plaintiff's individual share of it. Id. at 314-15, 317. The court held that the horse owners' interest in the money was common and undivided, and analogized their lawsuit to traditional common fund cases such as a shareholder's derivative action or a suit against a trustee by the distributees of an estate. Id. at 315. 32 BHC contends that, just as the fund as a whole was created to benefit either the tracks or the owners as an entity in Berman, the order flow payments in this case belong either to BHC or to the purported class as an entity because no individual customer transactions could generate the payments. But the crucial fact upon which Berman turned is that, under the disputed purse agreements in that case, no single plaintiff could claim an individual entitlement to any portion of the disputed prize money, because the agreements obligated the tracks to pay a certain percentage of their annual shares to the group of owners whose horses win purses. 414 F.2d at 313, 315 (emphasis added). The agreements create[d] no specific rights in any individual winner, but instead gave the owners an integrated right against the tracks. Id. at 315 n. 10. The First Circuit explicitly distinguished Berman from cases such as Oliver v. Alexander (cited in Shields v. Thomas, supra ), in which each plaintiff in a joint action sues on his own rights under his own separate contract. Id. at 315-16. 33 If the rationale of Berman is sound, it does not apply here, where Gilman alleges (and BHC does not for present purposes dispute) that BHC accepted order flow payments for handling securities transactions involving the class members' individual trading orders. BHC's argument--that its disgorgement of order flow payments would produce a common fund in which all class members would have a common and undivided interest--proceeds from the wrong point: the disgorgement of the payments to create the fund. Such a fund is created to facilitate the litigation process in virtually every class action, and has nothing necessarily to do with whether the plaintiffs shared a pre-existing (pre-litigation) interest in the subject of the litigation. 34 Under the classic common fund cases, what controls is the nature of the right asserted, not whether successful vindication of the right will lead to a single pool of money that will be allocated among the plaintiffs. See Pierson v. Source Perrier, S.A., 848 F.Supp. 1186, 1188 (E.D.Pa.1994) (rejecting a claim that the plaintiffs' request for disgorgement of profits ... creates a 'common and undivided interest,'  because [t]he proper focus should [ ] be upon the ... nature and value of the rights that [the plaintiffs] have asserted). To call any recovery that a class might win a fund to which the class plaintiffs are jointly entitled is merely added verbiage. There is no fund. The claim remains one on behalf of ... separate individuals for the damage suffered by each due to the alleged ... conduct of defendant.... Rock Drilling Local Union No. 17 v. Mason & Hanger Co., 217 F.2d 687, 695 (2d Cir.1954) (employees' allegation that union official's bribe-taking reduced their wages and impaired their working conditions was a series of separate and distinct claims that could not be aggregated to satisfy the amount in controversy). 35 In summary, BHC points to certain unitary characteristics of the plaintiffs' claims in order to avail itself of the common fund doctrine: the aggregation of the stock transactions on which order flow payments are made; the overall benefit that BHC derives from those payments (and that Gilman seeks to capture); and the single pot that would be created to receive and distribute damages. But these features of the case do not demonstrate a unitary claim; they merely reflect the problems of theory and proof in this case, and the named plaintiff's efforts to solve or plead around them. 36 Reliance on the aggregation of the transactions is Gilman's attempt to deal with the facts that (i) the benefit to BHC cannot be assigned to particular transactions or to activity in any single customer's account, and that (ii) any harm to plaintiffs is similarly elusive. Reliance on the device of a single pot from which the claimants would draw their damages is Gilman's effort to deal with the fact that damages (if any) cannot be proven or distributed on the basis of any single customer's transactions. It is of course commonplace to collect class action damages wholesale, put the proceeds in a single fund, and distribute the proceeds retail upon a showing of specific entitlement in accordance with the judgment. Thus, the aggregation of transactions and the pooling of damages are simply expedients of litigation and pleading that facilitate Gilman's efforts: (a) to show the existence of a duty to him and the other class members; (b) to demonstrate causation sufficient to justify reallocating the order flow payments from BHC to its customers; and (c) to collect damages for any or all of the claimants. 37 BHC's effort to aggregate the transactions and damages in this case fails to satisfy its burden of proof concerning the amount in controversy. 38