Francis Fleming, Jr. v. the Charles Schwab Corp.
878 F.3d 1146
9th Cir.2017Background
- Charles Schwab routed ~95% of its non-directed retail customer orders to UBS under an arrangement disclosed in account agreements that also mentioned Schwab could receive remuneration from venues.
- Two Schwab customers, Lim and Fleming, filed putative class actions alleging Schwab’s routing to UBS breached a broker’s “duty of best execution,” caused worse prices and slower executions, and violated state law (UCL, fiduciary/contract, unjust enrichment, misrepresentation claims); Fleming also sued UBS for allowing market manipulation.
- Defendants moved to dismiss, arguing lack of Article III standing and alternatively that SLUSA stripped the district court of jurisdiction; the district court found standing but dismissed under SLUSA.
- The Ninth Circuit reviewed standing de novo and found plaintiffs adequately alleged concrete, particularized injuries (higher execution costs and lost opportunities) sufficient for Article III at the pleading stage.
- The court analyzed whether plaintiffs’ state-law class claims alleged a “misrepresentation or omission” or use of a “manipulative or deceptive device” “in connection with” the purchase or sale of a covered security such that SLUSA precluded the actions.
- The Ninth Circuit held plaintiffs’ complaints, when viewed in substance, alleged deceptive conduct (promises of best execution while omitting material facts about routing to UBS) that could be pursued under federal securities law and thus are SLUSA-barred; Fleming’s claims against UBS for manipulative devices were also barred.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Article III standing | Plaintiffs alleged concrete, particularized losses from worse prices/failed executions | Defendants said plaintiffs failed to identify particular trades and lacked imminent injury for injunctive relief | Court: Plaintiffs have standing; alleged concrete, redressable monetary harms and continuing practices support injunctive standing |
| Whether SLUSA applies (misrepresentation/omission prong) | Best-execution breach framed as breach of contract/fiduciary duty, not fraud; claims avoid SLUSA | Defendants: complaints allege deceptive omissions/misrepresentations about best execution and routing | Court: Substance controls; complaints allege deceptive conduct (false promise/omitted conflict) actionable under §10(b)/Rule 10b-5 and thus SLUSA applies |
| Whether conduct was "in connection with" purchase/sale of securities | Plaintiffs: promise of best execution did not induce trades in particular securities, so not "in connection with" | Defendants: misrepresentations coincide with securities transactions and affect net price/execution | Court: Broad Dabit/Chadbourne test satisfied; misrepresentations materially related to trading decisions and thus "in connection with" |
| Claims against UBS for manipulation | Fleming alleged UBS enabled high-frequency traders to manipulate order flow, causing losses | UBS: argued SLUSA and other defenses | Court: Allegations pleaded manipulative or deceptive devices in connection with securities transactions and are SLUSA-barred |
Key Cases Cited
- Dabit v. Merrill Lynch, Pierce, Fenner & Smith Inc., 547 U.S. 71 (2006) (SLUSA and §10(b) overlap; misrepresentations that coincide with securities transactions fall within federal securities law)
- Chadbourne & Parke LLP v. Troice, 134 S. Ct. 1058 (2014) (SLUSA language imports §10(b)/Rule 10b-5 standards; in-connection test broadly construed)
- Freeman Inv., L.P. v. Pac. Life Ins. Co., 704 F.3d 1110 (9th Cir. 2013) (substance-over-form inquiry; plaintiffs cannot plead around SLUSA)
- Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266 (3d Cir. 1998) (recognizing §10(b) claim for breach of best-execution duty under certain facts)
- SEC v. Zandford, 535 U.S. 813 (2002) (caution against overbroad reading of §10(b); not every common-law fraud involving securities is §10(b) fraud)
- Kurz v. Fid. Mgmt. & Research Co., 556 F.3d 639 (7th Cir. 2009) (holding best-execution duty affects net price and can be regulated under the Exchange Act)