258 F. Supp. 3d 418
S.D.N.Y.2017Background
- Plaintiff Craig L. Schwab sues on behalf of a proposed class of E*TRADE customers who placed non-directed orders from July 11, 2011 through the present, alleging violations of §10(b)/Rule 10b-5 and control-person liability under §20(a).
- Core allegation: E*TRADE publicly promised to deliver "best execution" but routed orders to venues (notably G1X and previously Citadel) to maximize payments for order flow (PFOF) and to satisfy routing commitments, producing inferior execution.
- E*TRADE disclosed receipt of PFOF and had an ORBEC committee and various public statements and customer agreements that the complaint alleges were misleading because routing prioritized PFOF and contractual routing percentages.
- Regulatory history: internal reviews (2012), FINRA examination and a 2016 FINRA censure/fine related to execution-quality review deficiencies, sale of G1X in 2014 but with a 70% routing commitment to G1X for five years.
- Procedural posture: Defendants moved to dismiss the Second Amended Complaint (SAC) under Rule 12(b)(6). The Court granted the motion, dismissing the §10(b)/Rule 10b-5 and §20(a) claims without prejudice (but dismissing with prejudice any claims based on trades after the July 22, 2016 filing date) and granted leave to replead within 30 days.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Reliance (whether plaintiff can avoid pleading individual reliance) | Schwab invokes Affiliated Ute presumption or alleges he relied on E*TRADE representations of best execution when placing trades. | Defendants: claims are primarily affirmative misrepresentations (not omissions); plaintiff must plead actual reliance. | Court: Affiliated Ute inapplicable because this is an affirmative misrepresentation case; plaintiff failed to plead particularized, actual reliance; Count One dismissed without prejudice; trades after suit date dismissed with prejudice. |
| Scienter — corporate and individual defendants (whether plaintiff pleaded a strong inference of intent/recklessness) | Plaintiff alleges motive (PFOF profits) and circumstantial evidence (routing agreements, studies, regulatory actions) establishing recklessness or knowledge. | Defendants: alleged motives are generic (profit-seeking); no particularized facts linking senior officers to contrary information or reckless disregard. | Court: scienter not adequately pleaded as to corporate defendants or individual CEOs (Idzik, Roessner); motive allegations were generic and circumstantial allegations insufficient; Count One dismissed without prejudice. |
| Control-person liability under §20(a) (whether individual defendants culpably participated) | Schwab asserts Idzik and Roessner controlled E*TRADE and were culpable participants in the alleged fraud. | Defendants: no primary violation established; no particularized allegations of culpable participation (more than negligence). | Court: §20(a) claim dismissed without prejudice for failure to allege a primary §10(b) violation and culpable participation by the individual defendants. |
| Leave to amend / timeliness (whether plaintiff may replead) | Plaintiff seeks leave to amend to cure defects. | Defendants opposed on futility/timeliness grounds. | Court: granted leave to replead because amendments might cure deficiencies; plaintiff may file a Third Amended Complaint within 30 days; claims based on trades after July 22, 2016 are barred. |
Key Cases Cited
- Affiliated Ute Citizens v. United States, 406 U.S. 128 (rules for presumption of reliance in omission cases)
- ATSI Commc’ns v. Shaar Fund, Ltd., 493 F.3d 87 (pleading particularity under Rule 9(b) and PSLRA for securities fraud)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (standard for evaluating competing inferences re scienter)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility standard for Rule 12(b)(6))
- Ashcroft v. Iqbal, 556 U.S. 662 (inapplicability of treating legal conclusions as factual allegations)
- Stoneridge Inv. Partners v. Scientific-Atlanta, Inc., 552 U.S. 148 (reliance element in §10(b) private actions)
- Ganino v. Citizens Utils. Co., 228 F.3d 154 (elements of a §10(b) claim including reliance and scienter)
- ECA Local 134 IBEW Joint Pension Tr. v. JPMorgan Chase, 553 F.3d 187 (motive/opportunity standard for pleading scienter)