On May 10, 2018, the Unites States Court of Appeals for the Eighth Circuit affirmed the dismissal of putative class actions against TD Ameritrade, Inc. and certain related entities and individuals, asserting violations of various state laws including breach of defendant’s uniform client agreement, fraud, negligent misrepresentation, breach of fiduciary duty, and violations of the Nebraska Consumer Protection Act. Zola v. TD Ameritrade, Inc., No. 16-3016 (8th Cir. May 10, 2018). Plaintiffs alleged that defendant failed to direct its retail clients’ securities orders to trading venues that offered the best price, speed of execution, and likelihood of execution; instead, it allegedly directed orders to venues that catered to high-frequency traders who also paid defendant rebates for order flow. Slip op. at 3. The Court held that the “best execution” allegations were effectively claims of misrepresentations or omissions in connection with the purchase or sale of covered securities and were therefore precluded by the Securities Litigation Uniform Standards Act (“SLUSA”).

The Eighth Circuit’s analysis was guided by its January 2018 ruling in Lewis v. Scottrade, Inc., 879 F.3d 850 (8th Cir. 2018) (See 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, https://www.lit-sl.shearman.com/us-courts-of-appeals-for-the-eighth-and-ninth-cir), which had similarly addressed state-law claims based on a defendant’s failure to deliver best execution on client trades. The Lewis Court concluded that SLUSA barred state-law claims where the complaint alleges (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 Zola, it was undisputed that the complaints alleged “covered class actions” and that the transactions involved “covered securities” under SLUSA. The Court rejected certain plaintiffs’ attempt to distinguish Lewis by arguing that their complaints did not allege a misrepresentation or omission of a material fact or the use or employment of any manipulative or deceptive device or contrivance. Slip op. at 6. The Court held that, while the complaints “carefully avoided … words like misrepresentation, omission, or deception,” id. at 7, they were not materially different from the complaint in Lewis, and the gravamen of their claims still involved a misrepresentation or omission of material fact in connection with the purchase or sale of a covered security; namely, defendant’s alleged “failure to disclose the fact that it was selling its order flow to … trading venues that catered to high-frequency traders.” Id. Similarly, the Court rejected plaintiffs’ attempt to “style” a federal securities claim as a breach of contract claim in order to avoid the PSLRA, ruling that there was a disconnect between the alleged breach of contract (failure to consider the factors set forth in the client agreement) with the damages sought (disgorgement of profits), and that “fairly read” the wrongdoing alleged was the “covert placement of orders with venues that catered to high-frequency traders.” Id. at 8.

Finally, the Court rejected plaintiffs’ argument that, under the Supreme Court’s 2014 decision in Chadbourne & Parke LLP v. Troice, 134 S. Ct. 1058 (2014), SLUSA’s “in connection with” provision should be interpreted as requiring that the purchase or sale of a security must be “induced by the fraud” in order for the state-law claim to be precluded by SLUSA. The Court noted that the Lewis decision considered and rejected the same argument, concluding that “fraud or deception in trading that violates a broker’s duty of best execution is misconduct ‘in connection with’ the purchase and sale of covered securities.” Id. at 10.

The Eighth Circuit’s ruling serves as a reminder that plaintiffs cannot circumvent SLUSA simply by styling allegations that rest on claimed misrepresentations and omissions in connection with the purchase or sale of covered securities as state-law causes of action.

Zola v. TD Ameritrade, Inc.