WC CAPITAL MANAGEMENT, LLC, Plаintiff-Appellant, Willow Creek Capital Partners, L.P., a Delaware Limited Partnership, Willow Creek Short Biased 30/130 Fund, L.P., a Delaware Limited Partnership, Plaintiffs-Counter-Defendants-Appellants, v. UBS SECURITIES, LLC, a Delaware limited liability company, UBS AG, a Swiss company, Defendants-Counter-Claimants-Appellees.
Docket No. 11-122-cv.
United States Court of Appeals, Second Circuit.
Argued: July 18, 2012. Decided: April 1, 2013.
711 F.3d 322
LIVINGSTON, LOHIER, Circuit Judges, and RAKOFF, District Judge.
David C. Bohan, Katten Muchin Rosenman LLP, Chicago, IL, for Defendants-Counter-Claimants-Appellees UBS Securities, LLC and UBS AG.
Before: LIVINGSTON, LOHIER, Circuit Judges, and RAKOFF, District Judge.*
LOHIER, Circuit Judge:
We are asked to determine whether a broker‘s disclosures to its customers regarding margin maintenance requirements for margin accounts complied with Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act“) and
We affirm. Under
BACKGROUND
Because Willow Creek appeals from an order dismissing the complaint on the pleadings, we accept as true the facts alleged in the complaint, Graziano v. Pataki, 689 F.3d 110, 114 (2d Cir. 2012), and we may consider documents incorporated into or integral to the complaint, L-7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419, 422 (2d Cir. 2011).
A. Facts
WC is the general partner and manager of WCCP and WCSB, two “long/short” investmеnt partnerships that invest typically in the securities of companies with a market capitalization below $1 billion. In early 2007 UBS agreed to act as Willow Creek‘s prime broker to provide margin loans and prime brokerage services to WCCP and WCSB. Among other things, UBS maintained custody of WCCP‘s and WCSB‘s securities and cash collateral and provided them with loans on margin. Willow Creek relied on UBS‘s extension of margin credit to leverage its existing capital when acquiring securities. In return, Willow Creek paid UBS interest on the margin loans and other fees, including trading commissions.
The client account agreements between UBS and Willow Creek (the “Client Account Agreements“), dated January 12, 2007 and February 27, 2007, provided that UBS could demand additional collateral from Willow Creek during the course of their relationship. Specifically, the agreements stated that:
[i]f at any time any of the UBS Entities has reasonable grounds for insecurity with respect to [Willow Creek‘s] performance of any of the Contracts or its Obligations, any of the UBS Entities may demand . . . adequate assurance of due performance by [Willow Creek] within 24 hours. . . . The adequate assurance of performance may include . . . the delivery by [Willow Creek] to [UBS] of additional property as Collateral.
The Client Account Agreements also required that Willow Creek “maintain in and furnish to the Accounts such margin . . . as is required by Applicable Law and such greater amounts as the UBS Entities may in their sole discretion require.”
When Willow Creek opened its margin accounts, it received a document entitled “Disclosure Statement in Compliance with S.E.C. Rule 10b-16” (the “Initial Disclosure Statement“).1 The Initial Disclosure Statement explained that UBS had a security interest in the securities held in Willow Creek‘s margin accounts and discussed UBS‘s margin policies and the risks associated with margin accounts. In particular, a section entitled “General Margin Poli-
It is [UBS]‘s policy to review periodically any account as to which it has credit concerns in light of the value of the assets in the account. . . . Each account with a debit balance is reviewed on an individual basis with consideration given to factors such as market conditions generally at the time, marketability of the securities in the account, frequency of the activity in the account, duration of the account and concentration of particular securities in the account. Different weight may be given these factors by [UBS], and on the basis of its review, [UBS], in its sole discretion, may require additional collateral, above the amount required by the rules of the self regulatory agencies, as security for your obligations to [UBS].
Similarly, in a section entitled “Risks Associated with Margin Accounts,” the Initial Disclosure Statement provided:
[UBS] can increase its “house” maintenance margin requirements at any time and is not required to provide you with advance written notice. These changes in [UBS] policy often take effect immediately and may result in the issuance of a maintenance margin call. Your failure to satisfy the call may cause the member to liquidate or sell securities in your account(s).
The Initial Disclosure Statement also explicitly requestеd that Willow Creek “consult [its] account representative for more specific information with respect to [UBS] general margin policies.”
During a two-year period following the execution of the Client Account Agreements, WCCP and WCSB are alleged to have “performed in a superior fashion,” while UBS earned “millions of dollars” from Willow Creek. In December 2008, however, UBS notified Willow Creek that WCCP‘s account was in the second day of a margin call for approximately $6.85 million. Two days later, UBS sent Willow Creek a new document entitled “Prime Broker Margin Levels” (“Margin Levels I“), which “provide[d] a description of the margin rules currently in use in the Prime Brokerage Unit of [UBS].” UBS tоld Willow Creek that the document “explains the margin rules applied to your account.” Margin Levels I consisted of seven pages of detailed information regarding UBS‘s margin rules for various types of securities. The vast majority of the information in Margin Levels I involved a detailed description of internal margin guidelines in the form of complex formulas and tables that set out various multipliers and “margin add-ons” used by UBS to account for factors such as a portfolio‘s concentration or liquidity.3 UBS had not previously dis-
In February 2009 UBS informed Willow Creek that WCCP‘s account again was in a margin call, for roughly $13 million. UBS then sent Willow Creek a revised version of its Prime Broker Margin Levels document (“Margin Levels II“), which reflected what appear to be several changes to UBS‘s margin rules, including the adoption of new rules regarding margin adjustments and add-ons relating to a portfolio‘s liquidity and volatility. Prior to the margin call, Willow Creek received no notice that any changes would be made to UBS‘s margin rules. Instead, an e-mail from UBS accompanying the document indicated that the new liquidity and volatility adjustments had “affected requirements in [the Willow Creek] portfolio in recent weeks and months.” The revised margin rules significantly increased the amount of collateral Willow Creek was required to maintain in its account, forcing it to liquidate holdings and abandon some of its hedging strategies to raise capital to satisfy the February 2009 margin call.
Willow Creek claims that meeting the margin call ultimately caused it to lose over $25 million.4 It later moved its margin accounts from UBS to a different prime broker.
B. Procedural History
Willow Creek sued UBS in April 2010, asserting a claim under
The District Court granted UBS‘s motion on the ground that UBS had provided sufficient notice of its right to require the deposit of additional collateral at its discretion and had disclosed the factors it would consider in doing so. Having dismissed Willow Creek‘s
Prior tо oral argument, to aid our analysis, we solicited the views of the SEC regarding whether a private right of action exists under
DISCUSSION
Reviewing the District Court‘s judgment de novo, we “accept all factual allegations in the complaint as true and draw all reasonable inferences in plaintiffs’ favor.” Hayden v. Paterson, 594 F.3d 150, 160 (2d Cir. 2010) (quotation marks and alterations omitted). “To survive a
A. Federal Regulation of Margin Accounts
1. Margin Levels
The Federal Reserve Board and FINRA promulgated federal regulations and rules that required Willow Creek to maintain minimum equity levels of at least twenty-five percent in its margin accounts. See
2. Rule 10b-16
The SEC promulgated
a written statement or statements disclosing . . . (vii) the nature of any interest or lien retained by the broker or dealer in the security or other property held as collateral and the conditions under which additional collateral can be required[.]
[i]t shall be unlawful for any broker or dealer to make any changes in the terms
and conditions under which credit сharges will be made (as described in the initial statement made under paragraph (a) of this section), unless the customer shall have been given not less than thirty (30) days written notice of such changes. . . .
When
B. Rule 10b-16(a)
1. Standing
As an initial matter, UBS argues that Willow Creek lacks Article III standing to pursue a claim under
As relevant here, to have Article III standing Willow Creek “must have suffered an injury in fact” that is “concrete and particularized,” “actual or imminent,” and “fairly traceable to the challenged action.” Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992) (quotation marks and alterations omitted). “Injury in fact is a low threshold. . . .” Ross v. Bank of Am., N.A., 524 F.3d 217, 222 (2d Cir. 2008). When we assess a lack-of-standing argument on the basis of the pleadings, moreover, we take as true the factual allegations contained in the complaint. Ctr. for Reprod. Law & Policy v. Bush, 304 F.3d 183, 191-92 (2d Cir. 2002).
Here, the complaint alleged that information regarding UBS‘s speсific margin rules was “material to [Willow Creek‘s] decisions whether to purchase and sell securities in [its] accounts,” and that UBS‘s failure to disclose its specific margin rules to Willow Creek prior to the margin calls prevented it from using those rules “to plan and manage the [Willow Creek] accounts accordingly and effectively.” The complaint further alleged that “[h]ad [UBS] disclosed the full, truthful margin terms in a timely fashion, plaintiffs would not have acquired securities on margin from UBS, would not have continued to hold securities they had previously purchased, and would have made other decisions regarding purchasing and selling securities in the [Willow Creek] accounts.” Plaintiffs also аssert that they were injured “[a]s a direct and proximate result of the foregoing conduct,” and that meeting the margin call caused them to lose over $25 million. Taken together, these allegations are plainly enough to permit the inference that Willow Creek suffered a distinct and palpable financial injury fairly traceable to UBS‘s alleged failure to fully disclose its margin rules when Willow Creek opened its margin accounts. We conclude that, having indisputably satisfied the other Article III standing requirements, see Lujan, 504 U.S. at 560-61, Willow Creek has standing to pursue its claim against UBS under
2. Disclosures Required by Rule 10b-16(α)
UBS urges that, even if Willow Creek has standing, its disclosures in the Client Account Agreements and the Initial Disclosure Statement satisfied the requirements of
In determining what disclosures UBS was required to make, we look first to the language of
Of course, the term “conditions” is neither self-defining nor defined in the Exchange Act or
Two parts of the Initial Disclosure Statement in particular support our conclusion. To start, the Statement identified the factors UBS deemed relevant and also explicitly warned that UBS had the right to demand more collateral or change its margin requirements at any time. By listing the factors it would consider, UBS adequately informed Willow Creek of the range of future circumstances that might trigger a margin call. Indeed, the adjustments for liquidity, concentration, and volatility that are contained in Margin Levels I and Margin Levels II—and that Willow Creek claims were undisclosed and resulted in the detrimental upward adjustment of the collateral requirements for its accounts—are disclosed in the Initial Disclosure Statement by reference to the “marketability of the securities,” “concentration of particular securities in the account,” and “market conditions generally at the time.”
Critically, in our view, UBS also disclosed the existence of “more specific information with respect to [UBS] general margin policies,” which Willow Creek could request. Willow Creek, admittedly a sophisticated investor, failed to follow up on UBS‘s clear invitation to obtain that information. Oral Arg. Tr. at 3. Given the disclosures, warnings, and invitation to follow up that are contained in the Initial Disclosure Statement, we are hard put to conclude that Willow Creek has alleged deceptive conduct of the sort necessary to violate
The SEC‘s views in this case reinforce our decision. In its amicus brief, the SEC makes a persuasive argument in support of UBS‘s interpretation of the Rule. First, it explains that
“[A] reasonable agency determination, when advanced in an amicus brief that is not a post hoc rationalization, may be entitled to some deference on account of the specialized experience and information available to the agency.” Conn. Office of Prot. & Advocacy for Persons with Disabilities v. Hartford Bd. of Educ., 464 F.3d 229, 239 (2d Cir. 2006) (quotation marks, alteration, and citation omitted). Here, the SEC‘s position accords with our view that, given the purpose of the Rule, the Initial Disclosure Statement gave Willow Creek enough information about the circumstances and factors that may trigger a margin call. It accurately informed Willow Creek about the essential terms of UBS‘s margin loans and about the existence of more specific information that Willow Creek could request. More disclosure may be better, but this was enough.
Our conclusion is further supported by the legislative history of
Liang v. Dean Witter & Co., the only other circuit court decision on this issue, is generally in accord. There a brokerage firm had disclosed only that it might, at its discretion, require the account-holder to deposit cash or additional collateral. Id. at 1109. The D.C. Circuit concluded that “[t]o the extent . . . broker-dealers have adopted and invoke a general policy with
In urging a contrary conclusion, Willow Creek makes two principal arguments. First, it claims that Liang supports its position. The facts of that case, however, are easily distinguishable. Unlike UBS, the broker in Liang, Dean Witter, disclosed only that it maintained sole discretion to determine the need for additional collateral; it failed to disclose any factors that might prompt it to reevaluate the sufficiency of the existing collateral. Id. at 1109. Second, Willow Creek asserts that permitting brokers to disclose general fаctors, rather than the more specific formulas they may consider in making a margin call, undermines the purpose of
As alternative arguments, Willow Creek contends that UBS violated
C. Rule 10b-16(b)
Willow Creek also claims that UBS‘s failure to provide it with advance notice of the changes to its margin policies violated
Margin policies and credit charges are two separate concepts. In general, a broker‘s margin policies govern the amount of collateral an investor must provide, not the amount or timing of fees or the methods of calculating interest on the loan.
The SEC addressed this issue in 2001, when the NASD proposed a rule that would require NASD member firms to provide a margin disclosure statement to non-institutional customers when they opened margin accounts. The NASD‘s proposed rule would have required member firms to make the following disclosure:
The firm can increase its “house” maintenance margin requirements at any time and is not required to provide you advance written notice. These changes in firm policy often take effect immediately and may result in the issuance of a maintenance margin call.
Order Approving Proposed Rule Change by the NASD Relating to the Delivery Requirement of a Margin Disclosure Statement to Non-Institutional Customers, Exchange Act Release No. 34-44223, 66 Fed. Reg. 22,274, 22,275 (Aрr. 26, 2001). In approving the NASD‘s proposed rule as consistent with the Exchange Act and
Some investors believe that an NASD member firm must provide thirty days written notice before implementing this type of [margin requirement] change. While Rule 10b-16 under the Act requires members to disclose to customers the credit terms (interest rates and methods of calculating interest) for margin transactions and requires advance written notice of such changes, it does not require advance notice of the amount of margin required.
Finally, Willow Creek asserts that the District Court erred because it failed to grant it leave to amend its complaint. “It is within the sound discretion of the district court to grant or deny leave to amend.” Wilson v. Merrill Lynch & Co., 671 F.3d 120, 139 (2d Cir. 2011) (quotation mаrks and alteration omitted). Here, Willow Creek conclusorily requested leave to amend in two sentences in its opposition to UBS‘s motion for judgment on the pleadings, without specifying what additional factual allegations it would include if leave were granted, or how an amended complaint would cure the deficiencies the District Court identified in its original complaint. Accordingly, the District Court acted within its discretion in denying the request for leave to amend. See Metz v. U.S. Life Ins. Co., 662 F.3d 600, 603 (2d Cir. 2011). In any event, given our determination that UBS‘s disclosures satisfied the requirements of
In a similar vein, Willow Creеk argues that the District Court should have permitted discovery as to whether UBS invoked its generally applicable margin rules or simply exercised its discretion when it reevaluated the collateral requirements for Willow Creek‘s margin accounts. There is no need for us to remand for discovery; UBS‘s disclosures were sufficient even assuming that, as alleged, UBS invoked the rules set out in Margin Levels I and Margin Levels II.
CONCLUSION
For the foregoing reasons, we AFFIRM the judgment of the District Court.