On May 13, 2019, Judge Charles P. Kocoras of the United States District Court for the Northern District of Illinois dismissed with prejudice a putative class action against TD Ameritrade and an investment advisory company as barred by the Securities Litigation and Uniform Standards Act (“SLUSA”). Gray v. TD Ameritrade, Inc., No. 18 C 00419, 2019 WL 2085136 (N.D. Ill. May 13, 2019). Plaintiffs asserted state common law and statutory claims based on allegations that defendants had placed investors into trading strategies that had been misrepresented as conservative. The Court held that because plaintiffs’ claims coincided with a covered securities transaction, they were prohibited under SLUSA.
Plaintiffs alleged that a TD Ameritrade representative recommended an investment advisor and endorsed that advisor’s options trading strategy. In particular, plaintiffs alleged that defendants made a series of false representations, including that the options trading strategy could be expected to produce a 4-6% return on investment net of all fees, that the strategy “works in both up and down markets,” that even if there were down months the strategy “will make an annual profit,” and that the strategy would realize profits “[a]s sure as a clock ticks.” Id. at *1-2. Plaintiffs alleged that the strategy, in fact, resulted in “staggering losses” to themselves and the putative class, thereby giving rise to claims for breach of contract, breach of fiduciary duty, money had and received, and a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act. Id. at *2.
SLUSA prohibits bringing (1) a covered class action (2) based on state law (3) that alleges a misrepresentation or omission of material fact, or the use of any manipulative or deceptive device or contrivance (4) in connection with the purchase or sale of (5) a covered security. Id. at *3. Plaintiffs conceded that the first three elements were present, so the Court focused exclusively on whether the challenged conduct was “in connection with the purchase or sale of” a “covered security.” Id.
The Court rejected plaintiffs’ arguments that defendants’ alleged misrepresentations were made in connection with plaintiffs’ decision to retain defendants, as opposed to plaintiffs’ purchase of a security, and that plaintiffs had not been capable of making decisions “in connection with” the purchase of securities because defendants had complete discretion to make trading decisions. To the contrary, the Court held, a plaintiff need not personally make an investment decision to satisfy the “in connection with” requirement; the alleged fraud merely has to coincide with a covered securities transaction. Id. at *4 (citing, inter alia, Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 81 (2006)). The Court concluded that plaintiffs’ allegations “certainly coincide with a securities transaction because such a transaction is the foundation for their claim” and the alleged misrepresentations were the “catalyst” for plaintiffs to hire the investment advisor to engage in securities transactions on their behalf. Id.
The Court also rejected plaintiffs’ argument that the “covered security” element of SLUSA was not met because the allegations were with regard to an investment strategy as a whole. Citing the same Supreme Court precedent, the Court emphasized that SLUSA should not be read too narrowly. Considering the “practical implications” of plaintiffs’ argument, the Court held that any misrepresentation regarding the success or failure of a trading strategy, where that strategy involves transactions in covered securities, satisfies the “covered securities” element for SLUSA preclusion of state-law claims. Id. at *5.
The Court further determined that dismissal with prejudice was appropriate where SLUSA preclusion applies, although it noted that SLUSA would not prevent plaintiffs from pursuing non-class claims against defendants, which in this case would be subject to arbitration under the parties’ agreement. Id.