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Lewis v. Scottrade, Inc.

United States Court of Appeals, Eighth Circuit

January 9, 2018

Nicholas Lewis, on Behalf of Himself and All Others Similarly Situated Plaintiff- Appellant
v.
Scottrade, Inc. Defendant-Appellee

          Submitted: September 21, 2017

         Appeal from United States District Court for the Eastern District of Missouri - St. Louis

          Before LOKEN, ARNOLD, and SHEPHERD, Circuit Judges.

          LOKEN, CIRCUIT JUDGE.

         Nicholas Lewis filed this putative class action against Scottrade, Inc., a securities brokerage firm, alleging violations of the Missouri Merchandising Practices Act, Mo. Rev. Stat. §§ 407.010 et seq., breach of a common law fiduciary duty, and unjust enrichment. After Lewis filed the action in the Southern District of California, it was transferred to the Eastern District of Missouri, where Scottrade's principal executive offices are located. The complaint alleges that Scottrade routinely routes customer limit orders for the purchase and sale of securities to trading venues that pay "rebates" to sending brokers, violating Scottrade's "duty of best execution" in buying and selling securities on behalf of its customers. The district court[1] dismissed the complaint, concluding that Lewis's claims are precluded by the Securities Litigation Uniform Standards Act ("SLUSA"), 15 U.S.C. § 78bb(f)(1). Lewis appeals. Reviewing the dismissal for failure to state a claim de novo, we affirm. Siepel v. Bank of Am., N.A., 526 F.3d 1122, 1124 (8th Cir. 2008).

         I. Background

         Scottrade provides its customers online trading services, investment services, and market research tools. Its customers place orders to buy and sell individual securities. Scottrade executes the orders itself or through trading venues that include major stock exchanges, hedge funds, banks, electronic communication networks, and third-party market makers. Lewis, a Scottrade customer since 2012, has placed non-directed standing limit orders through Scottrade. In a "non-directed" order, the customer directs Scottrade to execute the order but does not specify the trading venue Scottrade should select. A "limit" order is an order to buy or sell a specific number of shares of a security at a specific or better price.

         The complaint alleges that the duty of best execution requires Scottrade to diligently choose the best trading venue for its clients, considering factors such as likelihood and speed of trade execution, and opportunities for price improvement. While Scottrade need not make "trade by trade determinations, " it must adhere to this duty in the aggregate and may not put its interests ahead of its customers. Lewis alleges that Scottrade violated the duty of best execution in 2013 and 2014 by directing nearly all customer non-directed standing limit orders to trading venues that offered the largest rebates to Scottrade, and by not passing these payments on to its customers. The complaint cites academic research allegedly demonstrating that limit order "routing decisions based primarily on rebates/fees appear to be inconsistent with best execution."

         II. Discussion

         "The magnitude of the federal interest in protecting the integrity and efficient operation of the market for nationally traded securities cannot be overstated." Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 78 (2006). To further that interest, Congress enacted SLUSA, which modified the Securities Act of 1933 and the Securities Exchange Act of 1934 to "prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of" the earlier Private Securities Litigation Reform Act ("PSLRA"). Id. at 82 (quotation omitted); see Dudek v. Prudential Secs., Inc., 295 F.3d 875, 877 (8th Cir. 2002).

         As codified in the 1934 Act, SLUSA provides that no "covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging -- (A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security; or (B) 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). A "covered class action" is one seeking damages on behalf of more than fifty persons. § 78bb(f)(5)(B). A "covered security" is one "traded nationally and listed on a regulated national exchange." Dabit, 547 U.S. at 83; see § 78bb(f)(5)(E).[2]

         In this case, it is undisputed that Lewis filed a "covered class action" and that Scottrade receives and executes on behalf of its customers orders for the purchase and sale of "covered securities." The issues on appeal are whether Lewis's complaint 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." When interpreting SLUSA, we presume "Congress envisioned a broad construction, so that the most troublesome class actions [will] be subject to the PSLRA's procedural reforms." Siepel, 526 F.3d at 1127 (quotation omitted). We "look at the substance of the allegations, based on a fair reading, " because SLUSA preclusion "is based on the conduct alleged, not the words used to describe the conduct." Kutten v. Bank of Am., N.A., 530 F.3d 669, 670-71 (8th Cir. 2008). Like the parties and the district court, we will begin with the second issue.

         A. The "In Connection With" Requirement

         Section 10(b) of the 1934 Act provides that it is unlawful to employ any manipulative or deceptive device or contrivance "in connection with the purchase or sale of any security." 15 U.S.C. § 78j(b). The Supreme Court has long construed that provision "not technically and restrictively, but flexibly to effectuate its remedial purposes." S.E.C. v. Zandford, 535 U.S. 813, 819 (2002) (quotation omitted). In Zandford, the Court reiterated that in "a fraudulent scheme in which the securities transactions and breaches of fiduciary duty coincide" -- for example, where "each sale was made to further [the] fraudulent scheme" -- the breaches were "in connection with securities sales within the meaning of § 10(b)." Id. at 820, 825. In Dabit, the Court applied that same broad interpretation to identical "in connection with" language Congress used in SLUSA. 547 U.S. at 85-86. "Under our precedents, ...


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