204 F.Supp.3d 1064
E.D. Mo.2016Background
- Plaintiff Nicholas Lewis is a longtime Scottrade customer who placed non‑directed standing limit orders; he alleges Scottrade routes such orders to venues that pay the largest rebates rather than those offering best execution.
- Lewis asserts Scottrade owed a duty of best execution and that routing driven by rebates produced materially worse execution (less favorable prices, slower fills, lower likelihood of execution).
- Lewis brought a putative class action asserting: (1) Missouri Merchandising Practices Act violation; (2) breach of fiduciary duty for failing to seek best execution; and (3) unjust enrichment.
- Scottrade moved to dismiss under the Securities Litigation Uniform Standards Act (SLUSA), arguing the state‑law class claims are precluded because they are essentially fraud claims “in connection with” the purchase or sale of covered securities.
- Court found the gravamen of Lewis’s claims is deceptive conduct (failure to disclose conflict/deficient execution) that coincided with and was material to securities transactions, and held SLUSA precluded the state‑law class claims.
- Court granted Scottrade’s motion and dismissed Lewis’s claims without prejudice.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether SLUSA precludes Lewis’s state‑law class claims | Lewis: claims are not fraud‑based; alleged duty‑of‑best‑execution violations are not "in connection with" purchase/sale of covered securities and thus not barred by SLUSA | Scottrade: claims are essentially fraud/deceptive‑conduct claims tied to securities transactions and thus SLUSA‑precluded; artful pleading cannot avoid SLUSA | Held: SLUSA precludes the claims because their gravamen is deceptive conduct related to order routing that coincides with and is material to securities transactions |
| Whether fiduciary‑duty claim avoids SLUSA because it lacks fraud elements | Lewis: fiduciary duty claim does not require misrepresentation/omission, so it falls outside SLUSA | Scottrade: fiduciary breach amounts to constructive/deceptive fraud and has been treated as such by courts and SEC | Held: Court rejects Lewis — fiduciary breach here rests on nondisclosure/conflict and is treated as deceptive conduct, so SLUSA applies |
| Whether Dabit/"in connection with" requires a direct link between misrepresentation and specific covered‑security purchases | Lewis: relies on Chadbourne to argue misrepresentation must be material to decision to buy/sell a covered security | Scottrade: Dabit permits broad construction; misconduct that coincides with trades suffices | Held: Court applies Dabit — misconduct that affects trades and is material to decisions satisfies "in connection with" requirement |
| Whether claims should be dismissed with prejudice | Lewis: (implicitly) seeks to pursue state claims | Scottrade: seeks dismissal under SLUSA; alternatively argues regulatory preemption and contract defense | Held: Claims dismissed without prejudice under SLUSA; court did not reach alternative arguments |
Key Cases Cited
- Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (establishes broad SLUSA "in connection with" standard)
- Chadbourne & Parke LLP v. Troice, 134 S. Ct. 1058 (interprets when misrepresentations are "in connection with" covered securities purchases)
- Freeman Invs., L.P. v. Pacific Life Ins. Co., 704 F.3d 1110 (gravamen test: deceptive conduct that forms essence of claim triggers SLUSA)
- Kurz v. Fidelity Mgmt. & Research Co., 556 F.3d 639 (broker best‑execution allegations are "in connection with" securities transactions)
- Rowinski v. Salomon Smith Barney Inc., 398 F.3d 294 (state fiduciary‑duty claims precluded by SLUSA when based on nondisclosure of broker profit)
- SEC v. Zandford, 535 U.S. 813 (misconduct coinciding with securities transactions can satisfy "in connection with")
- Klemme v. Best, 941 S.W.2d 493 (Missouri: breach of fiduciary duty characterized as constructive fraud)