Citadel Securities, LLC v. Chicago Board Options Exchange, Inc.
808 F.3d 694
7th Cir.2015Background
- Plaintiffs (market-making broker-dealers including Citadel and Susquehanna) sued five national options exchanges alleging they charged and collected payment-for-order-flow (PFOF) fees on millions of orders that were not properly subject to those fees.
- The alleged error arose from a third-party broker-dealer (the “Subject Firm”) mis-marking orders; exchanges later accepted penalties and payments from the Subject Firm for uncollected fees.
- Plaintiffs sought restitution from the exchanges in Illinois state court; defendants removed the case to federal district court under federal securities jurisdiction (15 U.S.C. § 78aa).
- The district court denied remand and dismissed the suit without prejudice for lack of subject-matter jurisdiction, concluding plaintiffs failed to exhaust administrative remedies before the SEC.
- Plaintiffs appealed the dismissal and the denial of remand; the Seventh Circuit affirmed, holding exhaustion was required and remand was improper.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plaintiffs had to exhaust SEC administrative remedies before suing exchanges | Exchanges acted in a private, for‑profit capacity (not regulatory), so SEC exhaustion is unnecessary | PFOF fees were adopted as exchange rules under the Exchange Act, so SEC administrative review is the proper avenue | Court: Exhaustion required; plaintiffs sought enforcement of exchanges’ own rules, which fall within SEC review authority |
| Whether exhaustion could be waived because SEC relief would be inadequate or futile | SEC cannot provide meaningful or monetary relief, so exhaustion would be futile | Plaintiffs made no attempt to seek SEC review; statute provides administrative remedies and potential monetary penalties | Court: Futility not shown; waiver inappropriate absent clear evidence exhaustion is useless |
| Whether dismissal should be with prejudice based on defendants’ immunity, preemption, or failure to state a claim | Plaintiffs implicitly argued dismissal should be without prejudice so they may pursue remedies | Defendants argued merits-based defenses warranted dismissal with prejudice | Court: Dismissal for lack of subject-matter jurisdiction is not on the merits; dismissal without prejudice was proper |
| Whether removal to federal court was proper | Plaintiffs contended PFOF claims are private/state-law issues and remand was required | Defendants invoked § 78aa and the exclusive federal interest in enforcing exchange rules adopted under the Exchange Act | Court: Removal proper; plaintiffs’ claims implicate federal law and enforcement of exchange rules, so federal courts have exclusive jurisdiction |
Key Cases Cited
- Shawnee Trail Conservancy v. U.S. Dep’t of Agric., 222 F.3d 383 (7th Cir. 2000) (district court’s discretion to require exhaustion reviewed for abuse of discretion)
- Rivet v. Regions Bank of Louisiana, 522 U.S. 470 (U.S. 1998) (well‑pleaded complaint rule and artful‑pleading doctrine for federal‑question jurisdiction)
- D’Alessio v. N.Y. Stock Exch., Inc., 258 F.3d 93 (2d Cir. 2001) (federal jurisdiction where exchange failed to perform statutory duties)
- Sparta Surgical Corp. v. Nat’l Ass’n of Sec. Dealers, Inc., 159 F.3d 1209 (9th Cir. 1998) (state‑law claims implicating violation of SRO rules trigger § 78aa jurisdiction)
- Murray v. Conseco, Inc., 467 F.3d 602 (7th Cir. 2006) (dismissal for lack of subject‑matter jurisdiction is not on the merits)
- Capitol Leasing Co. v. F.D.I.C., 999 F.2d 188 (7th Cir. 1993) (pleading standards for jurisdictional review)
- Weissman v. Nat’l Ass’n of Sec. Dealers, Inc., 500 F.3d 1293 (11th Cir. 2007) (distinguishing immunity/regulatory‑private analysis for SROs)
- Smith v. Blue Cross & Blue Shield United of Wisconsin, 959 F.2d 655 (7th Cir. 1992) (limited futility exception to exhaustion)
- Alexander v. Mount Sinai Hosp. Med. Ctr., 484 F.3d 889 (7th Cir. 2007) (de novo review of removal propriety)