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On September 17, 2018, the Southern District of New York denied class certification in a breach of contract action alleging that a broker-dealer failed to conduct suitability analyses before recommending that customers invest in certain closed-end mutual funds. Fernandez v. UBS AG, 2018 WL 4440498 (S.D.N.Y. 2018) (Stein, J.). [1] The court held that Rule 23(a)(3)’s typicality requirement was not met because “the manner in which [the broker-dealer] allegedly failed to perform a suitability analysis before recommending a [f]und to a proposed class member is different for each class member.” The court further held that Rule 23(b)(3)’s predominance requirement was not satisfied because the single common question concerning the scope of the broker-dealer’s contractual obligation to conduct suitability analyses was “substantially outweighed by numerous individual questions.”

The suitability provision in the client agreements at issue stated as follows: “We must have a reasonable basis for believing that any securities recommendations we make to you are suitable and appropriate for you, given your individual financial circumstances.” The court observed that “[w]hether an investment is suitable for a particular client is an inherently individualized inquiry” that “depends on the unique characteristics of both the investor and the investment at a particular point in time.” Plaintiffs nevertheless claimed that they would be able to present “common proof” of the broker-dealer’s alleged across-the-board failure to conduct suitability analyses by “focusing on the conduct of the [broker-dealer], together with a representative sample of client accounts.” The court found plaintiffs failed to show that the facts in dispute were “susceptible to generalized proof,” and held that “individual questions overwhelm the classwide questions” for several reasons.

First, the court rejected plaintiffs’ contention that the investments were “inherently unsuitable” for any investor because they were not structured to preserve capital, one of the stated investment objectives. The court disagreed that “a security with multiple enumerated objectives is unsuitable per se if it is inconsistent with any one of its objectives,” and noted that plaintiffs “cite[d] no evidence that this standard has ever actually been applied in the real world.” With respect to plaintiffs’ related argument concerning the alleged “riskiness” of the investments, the court determined that a security’s excessive riskiness for one client “is not itself proof that the security is excessively risky (or unsuitable) for all investors.”

Second, the court found plaintiffs’ expert did not provide the requisite “generalized proof” that the broker-dealer “fail[ed] to undertake any client-focused suitability analyses before recommending the [f]unds to the proposed class members.” Plaintiffs’ expert assumed that an appropriate suitability analysis had been conducted only if an advisor provided written documentation of the analysis, “together with all of the reasons underlying that determination” with respect to each relevant suitability factor. The court found this approach “not credible,” and determined that there was no basis for the requirement that a suitability analysis must include “express consideration and documentation of every single” suitability factor.[2] The court found plaintiffs’ expert in fact demonstrated that the broker-dealer’s “alleged suitability failures were far from uniform” because each individual financial advisor may have considered certain factors, but not others, when conducting a suitability analysis for each individual client.

Third, the court held plaintiffs could not rely on “communications directed to the public at large,” such as advertisements and client fliers, to establish that the broker-dealer had “recommended” the investments at issue to each of the individual plaintiffs. The court found that “whether a transaction was recommended such that [the broker-dealer’s] suitability obligations arose . . . is an individualized question.” Fourth, the court found plaintiffs could not show that the alleged failure to conduct suitability analyses caused their losses without demonstrating that the investments were “actually unsuitable” for each individual plaintiff. Fifth, the court determined that “class members would be individually subject to affirmative defenses such as failure to mitigate and duty to object.”

Finally, the court found that there would be individual questions concerning damages, because “the proper measure of market-adjusted damages is (1) what clients would have received if [the broker-dealer] had performed a suitability analysis and recommended a suitable investment, less (2) what they actually received from their investments in the [f]unds.”

The court concluded that while plaintiffs may not pursue their claims as a class, “they may arguably pursue their individual claims in FINRA arbitrations if they so choose.”