On June 12, 2017, Judge Richard Seeborg of the United States District Court for the Northern District of California dismissed without prejudice a putative securities class action against Charles Schwab & Co. (“Schwab”) under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Crago v. Charles Schwab & Co., Inc., 2017 WL 2540577 (N.D. Cal. June 12, 2017). Plaintiffs, Schwab customers who placed trades through Schwab, alleged that Schwab’s stated commitment to securing best execution for its clients was false and misleading in light of Schwab’s bulk order routing through UBS Securities LLC (“UBS”), as a result of which plaintiffs allegedly suffered harm because they lost the opportunity for price improvement. The Court held that although plaintiffs had standing to pursue their claims, they had insufficiently alleged falsity, scienter, economic loss, loss causation and reliance, and granted leave to replead.
Of particular note were the Court’s contrasting analyses with respect to standing and economic loss, both of which related to the damages plaintiffs allegedly suffered, namely, lost price improvement resulting from Schwab’s failure to seek prices on various exchanges and, instead, to route virtually all non-directed trade orders to UBS. Regarding standing, Schwab argued that plaintiffs’ allegations failed to establish “injury in fact” because they had not identified specific trades for which Schwab’s practices caused plaintiffs to suffer identifiable losses. The Court rejected this argument, noting that plaintiffs had alleged that Schwab entered into an agreement with UBS to route trades and that Schwab routed a majority of the types of trades plaintiffs engaged in through UBS. Moreover, plaintiffs had specifically alleged that Schwab’s average price improvement was less than that of competitors who did not accept payment for order flow, as Schwab did from UBS. Accordingly, the Court found that plaintiffs “advance[d] sufficient allegations of concrete and particularized harm” to give them the legal right to sue. Id. at *4.
However, the Court concluded that plaintiffs failed to plead economic loss with particularity. Although plaintiffs’ having alleged that they experienced losses as a result of Schwab’s failure to seek the best execution price was sufficient to confer Article III standing, the Court found that these allegations were too generalized to suffice under the PSLRA. Specifically, because plaintiffs did “not indicate any trades on which they actually experienced losses” and had “not identified any trades on which they lost out on price improvement,” they could not “state the amount of price improvement of which they were deprived.” Id. at *6–7. Thus, plaintiffs had not pleaded actual loss with the particularity required under the PSLRA.
This decision demonstrates that an alleged economic injury that may be sufficient to confer standing nevertheless may not be sufficient to plead a claim for securities fraud.
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