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Zola v. TD Ameritrade, Inc.

United States Court of Appeals, Eighth Circuit

May 10, 2018

Jay Zola; Jeremiah Joseph Lowney Plaintiffs-Appellants
v.
TD Ameritrade, Inc.; TD Ameritrade Clearing, Inc. Defendants-Appellees Tyler Verdieck, A California Citizen, Individually, And On Behalf Of All Others Similarly Situated Plaintiff-Appellant
v.
TD Ameritrade, Inc., a New York Corporation Defendant-Appellee Michael Sarbacker, Individually and on behalf of all others similarly situated Plaintiff-Appellant TD Ameritrade Holding Corporation; TD Ameritrade, Inc.; TD Ameritrade Clearing, Inc.; Frederic J. Tomczyk; Paul Jiganti Defendants-Appellees

          Submitted: December 12, 2017

          Appeals from United States District Court for the District of Nebraska - Omaha

          Before WOLLMAN, LOKEN, and MELLOY, Circuit Judges.

          WOLLMAN, Circuit Judge.

         Jay Zola and Jeremiah Joseph Lowney (collectively, Zola), Tyler Verdieck, and Michael Sarbacker filed separate class-action complaints against TD Ameritrade, Inc., alleging various state-law claims.[1] The complaints alleged that TD Ameritrade breached its duty of best execution when it routed client orders to buy and sell securities to trading venues that paid TD Ameritrade top dollar for its order flow. The district court[2] dismissed the complaints for failure to state a claim after concluding that the claims were precluded by the Securities Litigation Uniform Standards Act of 1998 (SLUSA). See 15 U.S.C. § 78bb(f)(1). Having reviewed the dismissal de novo, we affirm. See Lewis v. Scottrade, Inc., 879 F.3d 850, 851 (8th Cir. 2018), deadline for filing petition for cert. extended to May 9, 2018, (standard of review).

         I. Background

         TD Ameritrade provides brokerage services to retail investors. Its clients place orders to buy and sell securities with TD Ameritrade, which then directs the orders to trading venues that execute the transactions. The plaintiffs alleged that TD Ameritrade failed to direct client orders to the trading venues that offered the "best execution" possible for the order-that is, the best price, speed of execution, and likelihood that the trade would be executed. TD Ameritrade instead directed the orders to the trading venues that were willing to pay TD Ameritrade "kickbacks, " i.e., rebates or payments for order flow.

         According to the plaintiffs, those trading venues catered to high-frequency traders, which use sophisticated algorithms, advanced technology, and physical proximity to stock exchange servers to quickly detect and trade on subtle market signals. For example, Zola alleged that high-frequency traders engage in a practice called "electronic front-running, " Zola Compl. ¶ 11, "meaning that they detect patterns involving large incoming trades, and then execute their own trades before those incoming trades are completed, " Waggoner v. Barclays PLC, 875 F.3d 79, 86 (2d Cir. 2017), petition for cert. filed, 86 U.S.L.W 3455 (U.S. Feb. 26, 2018) (No. 17-1209). This practice "results in the incoming trades being more costly or less lucrative for the individuals or institutions making them." Id. at 86-87. Similarly, Verdieck and Sarbacker alleged that TD Ameritrade directed non-marketable limit orders to Direct Edge, which then executed those orders more slowly and at a less competitive price than the orders of the high-frequency traders.[3]

         Zola and Sarbacker alleged that TD Ameritrade breached its uniform client agreement when it failed to consider certain factors in deciding where to direct client orders and instead considered only the trading venues that were willing to pay a premium for TD Ameritrade's order flow.[4] Sarbacker also alleged claims of fraud, negligent misrepresentation, violations of the Nebraska Consumer Protection Act, and aiding and abetting. Verdieck alleged that TD Ameritrade breached its fiduciary duty of best execution by directing non-marketable limit orders to Direct Edge. The three complaints involve similar factual allegations: that TD Ameritrade devised a scheme to maximize its receipt of rebates and payments at the expense of its clients by knowingly routing orders to trading venues where high-frequency traders could manipulate and exploit the slower execution of TD Ameritrade's client orders. Those trading venues paid TD Ameritrade handsomely for its order flow. According to Zola's complaint, for example, the three trading venues to which TD Ameritrade directed more than 90 percent of its orders from 2011 through 2013 paid more than $600 million for the order flow. Zola, Verdieck, and Sarbacker claim as damages those rebates or payments that TD Ameritrade received.

         II. Discussion

         Congress passed the Private Securities Litigation Reform Act (PSLRA) in 1995 to curb "perceived abuses" of federal class-action securities litigation by imposing special requirements and obstacles on plaintiffs filing such actions. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 81 (2006). Plaintiffs responded to the PSLRA by bringing "class actions under state law, often in state court, " in an attempt to "avoid the federal forum altogether." Id. at 82. Accordingly, Congress enacted SLUSA in 1998 to close the gap in PSLRA coverage and "prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of" the PSLRA. Id.

         SLUSA requires the district court to dismiss any "covered class action" in which the plaintiff alleges "a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security" or "that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security." 15 U.S.C. § 78bb(f)(1). It is undisputed that the complaints here alleged "covered class actions" and that the transactions at issue involved "covered securities."[5]

         Our recent decision in Lewis v. Scottrade, Inc., 879 F.3d 850 (8th Cir. 2018), guides our analysis in this case. In Lewis, we addressed the two issues presented in these consolidated appeals: 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." Id. at 852. Lewis's complaint alleged that he had placed non-directed standing limit orders through the broker Scottrade, which violated its duty of best execution by routinely routing such orders to trading venues that paid it large rebates. Lewis pleaded only state-law claims, ...


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