U.S. Courts Of Appeals For The Eighth And Ninth Circuits Each Rules That SLUSA Precludes Alleged Violations Of State Laws Based On Breach Of Duty Of Best Execution
On December 29, 2017 and January 9, 2018, respectively, the United States Court of Appeals for the Ninth Circuit and the United States Court of Appeals for the Eighth Circuit each affirmed district court dismissals of putative securities class actions asserting violations of various state laws based on securities brokerage firm defendants’ alleged violation of the “duty of best execution” in executing client trades. Fleming v. Charles Schwab Corp., No. 16-15179 (9th Cir. Dec. 29, 2017); Lewis v. Scottrade, Inc., No. 16-3808 (8th Cir. Jan. 9, 2018). In affirming the district courts’ dismissals of these clams, both the Ninth Circuit and the Eighth Circuit reasoned that the alleged “best execution” violations were, in substance, allegations of deceptive conduct “in connection with the purchase or sale of” a security and thus barred by the Securities Litigation Uniform Standards Act (“SLUSA”).
The core of plaintiffs’ allegations in both cases was that defendants—both securities brokerage firms—violated their duties of best execution by routing trades to trading venues in favor of their own interests over their clients’ interests, without considering factors such as execution, speed, and best pricing for their customers. In the Schwab action, plaintiffs alleged that Schwab routed all trades to UBS based on its own contractual arrangement with UBS when it could have routed trades to many other brokers, some of which would have executed the trades for less money or more quickly. Similarly, in the Scottrade action, the plaintiff alleged that Scottrade routinely routed customer limit orders for the purchase and sale of securities to trading venues that paid the largest rebates to the sending brokers. Based on these allegations, plaintiffs in both actions asserted violations of state and common laws, and the district courts in both actions dismissed the claims as barred by SLUSA.
SLUSA bars private plaintiffs from bringing a covered class action based on state law claims alleging that defendants made a misrepresentation or omission or employed any manipulative or deceptive device in connection with the purchase or sale of a covered security. Because plaintiffs in both cases conceded that the complaints involved “covered class actions” based on state-law claims involving “covered securities,” the issues on appeal were whether the complaints alleged (1) a misrepresentation or omission or a manipulative or deceptive device or contrivance that was (2) in connection with the purchase or sale of a covered security.
In affirming the dismissals, both the Ninth Circuit and the Eighth Circuit courts reasoned that the term “in connection with the purchase of a sale of any security” must be interpreted broadly. It is sufficient if the misconduct alleged “coincide[d]” with a securities transaction. Because the complaints alleged that plaintiffs were induced to trade based on the false promise of best execution, the “in connection” prong was satisfied. Further, in considering the “misrepresentation or omissions requirement,” both courts held that it was not determinative that plaintiffs pleaded causes of action—breach of fiduciary duty, unjust enrichment and unfair competition—that do not include manipulative conduct as an element. Rather, the courts concluded that, “[i]n determining whether the SLUSA bar applies, substance governs over form,” and that the substance of plaintiffs’ allegations was that defendants failed to disclose that they were not providing best execution, or, alternatively, deceived plaintiffs into believing that defendants would deliver “best execution.” Because both prongs were satisfied, the claims were barred by SLUSA.
The Courts of Appeals’ decisions serve as a reminder that plaintiffs cannot circumvent SLUSA by alleging state law claims where the substance of the underlying allegations relate to misconduct “in connection with the purchase or sale” of a security.