903 F.3d 95
3rd Cir.2018Background
- Vanguard advertised $2 stock-trade commissions for accounts with $500,000–$1,000,000 balances.
- In May 2016, Alex and Orit Taksir (meeting the threshold) were charged $7 commissions on two Nokia stock purchases.
- Vanguard initially explained the higher charges by citing IRS nondiscrimination rules and said discount eligibility was not listed on its fee schedule; later charged $2 on a subsequent trade in the same account.
- The Taksirs filed a putative class action asserting (1) UTPCPL fraud/deception and (2) breach of contract under Pennsylvania law.
- The district court dismissed the UTPCPL claim on other grounds but denied dismissal of the breach-of-contract claim; Vanguard appealed interlocutorily under 28 U.S.C. § 1292(b), arguing SLUSA preemption.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether SLUSA bars the breach-of-contract claim based on alleged commission overcharges | Overcharge is a contractual breach tangential to securities trades and not a securities-transaction misrepresentation; SLUSA does not apply | SLUSA bars state-law class actions alleging misrepresentations "in connection with" purchases or sales of covered securities; the overcharge is such a misrepresentation | Held: SLUSA does not bar the breach claim — the overcharges lack the required "connection that matters" to securities transactions |
| Whether the alleged misconduct was "in connection with" a purchase or sale of a covered security under SLUSA | The overcharge is not material to buy/sell decisions and thus not ‘‘in connection with’’ | The overcharges coincide with securities transactions and therefore meet SLUSA's "in connection with" standard | Held: Applying Troice and Dabit, the court concluded the overcharges were not materially connected to the purchase/sale decision and thus not covered by SLUSA |
| Whether the alleged overcharges were objectively material to a reasonable investor's buy/sell decision | Taksirs: single-digit, nonrecurring commission differences are not material to investment decisions for investors with large account balances | Vanguard: even small misrepresentations about fees are material and satisfy SLUSA's standard | Held: Not material — differences were incidental, low-value, and unlikely to affect a reasonable investor's decision |
| Whether the breach-of-contract claim is a disguised fraud claim preempted by SLUSA (Rowinski argument) | Taksirs: claim is contractual—Vanguard failed to perform its contractual promise to charge $2; misrepresentation characterization is inapposite | Vanguard: allegations of misrepresentation underlie the claim, so SLUSA preemption applies per Rowinski | Held: Even if characterized as misrepresentation, the assertions fail SLUSA's "in connection with" and materiality requirements, so Rowinski does not mandate preemption |
Key Cases Cited
- Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (interpretation of "in connection with" broadly; fraud that "coincides" with securities transactions)
- Chadbourne & Parke LLP v. Troice, 571 U.S. 377 (materiality required: misrepresentation must be material to a buy/sell decision to be "in connection with")
- Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (materiality assessed by whether a reasonable investor would consider the information significant)
- Rowinski v. Salomon Smith Barney Inc., 398 F.3d 294 (3d Cir.) (state-law claims based on material misrepresentations can satisfy SLUSA prerequisites)
- Appert v. Morgan Stanley Dean Witter, Inc., 673 F.3d 609 (7th Cir.) (inflated commissions not barred by SLUSA)
- Goldberg v. Bank of Am., 846 F.3d 913 (7th Cir.) (secret side payments deducted from accounts were material and triggered SLUSA)
- Fleming v. Charles Schwab Corp., 878 F.3d 1146 (9th Cir.) (best-execution breaches can be material; noted dicta that pure commission overcharge claims may not be barred)
- Lewis v. Scottrade, Inc., 879 F.3d 850 (8th Cir.) (failure of best execution can meet SLUSA's connection requirement)