Jay Zola v. TD Ameritrade, Inc.
889 F.3d 920
8th Cir.2018Background
- Plaintiffs (Zola, Verdieck, Sarbacker) are TD Ameritrade customers who brought state-law class actions alleging TD Ameritrade routed client orders to trading venues that paid high rebates, rather than to venues providing best execution.
- Complaints allege routing favored venues used by high-frequency traders, enabling front-running or slower/less favorable executions, and that TD Ameritrade received substantial payments for order flow (hundreds of millions).
- Claims pleaded include breach of contract (uniform client agreement), breach of fiduciary duty (best execution), and related state-law tort and consumer-protection claims; damages sought included disgorgement of rebates/payments.
- District court dismissed under SLUSA as precluding covered class actions alleging misrepresentations/omissions or manipulative devices in connection with purchase or sale of covered securities. Plaintiffs appealed.
- Eighth Circuit, applying Lewis v. Scottrade, reviewed de novo and affirmed dismissal, holding plaintiffs’ complaints in substance alleged omissions/deceptive practices "in connection with" covered securities trades and thus were SLUSA-precluded.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether complaints allege a "misrepresentation or omission" or "manipulative or deceptive device" under SLUSA | Zola/ Verdiek: claims are ordinary breach of contract or fiduciary-duty claims, not fraud; no alleged misrepresentations/omissions | TD Ameritrade: routing scheme amounted to deceptive practice/omission—secretly selling order flow and enabling worse executions | Held: Gravamen is TD Ameritrade’s failure to disclose its order-routing scheme; claims amount to omissions/deceptive practices and are SLUSA-covered |
| Whether alleged misconduct was "in connection with" the purchase or sale of a covered security | Plaintiffs: misconduct affected choice of broker, not the decision to buy/sell covered securities; Chadbourne narrows Dabit | TD Ameritrade: rebates were obtained each time a covered security trade was executed—misconduct coincides with each trade | Held: Dabit/precedent govern; the failure to disclose best-execution breaches coincided with each covered-security transaction and satisfies "in connection with" requirement |
| Whether leave to amend Zola's contract claim should have been allowed | Zola: should be permitted to amend to avoid SLUSA preclusion | TD Amerrade: amendment would be futile because underlying claim is securities-related and SLUSA bars it | Held: Denial of leave to amend affirmed as futile—no proposed amendment provided and SLUSA preclusion unavoidable |
Key Cases Cited
- Lewis v. Scottrade, Inc., 879 F.3d 850 (8th Cir. 2018) (broker failure to disclose lack of best execution is SLUSA-precluded)
- Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (2006) (SLUSA’s "in connection with" interpreted broadly; fraud need only "coincide" with securities transaction)
- Chadbourne & Parke LLP v. Troice, 134 S. Ct. 1058 (2014) (SLUSA does not reach fraud about uncovered securities; did not modify Dabit’s general approach)
- S.E.C. v. Zandford, 535 U.S. 813 (2002) (Section 10(b) language construed flexibly; informs SLUSA interpretation)
- Fleming v. Charles Schwab Corp., 878 F.3d 1146 (9th Cir. 2017) (broker deceptive routing alleged to breach best-execution is SLUSA-covered)
- Holtz v. JPMorgan Chase Bank, N.A., 846 F.3d 928 (7th Cir. 2017) (failure to achieve best execution implicates securities law, not only contract law)
- Kurz v. Fidelity Mgmt. & Research Co., 556 F.3d 639 (7th Cir. 2009) (SLUSA does not preclude genuine contract claims, but excludes securities-concealed frauds)
- Dudek v. Prudential Sec., Inc., 295 F.3d 875 (8th Cir. 2002) (SLUSA preclusion analysis focuses on substance of allegations)
- Kutten v. Bank of Am., N.A., 530 F.3d 669 (8th Cir. 2008) (look to substance of complaint; conduct matters more than labels)