Nicholas Lewis v. Scottrade, Inc.
879 F.3d 850
| 8th Cir. | 2018Background
- Nicholas Lewis, a Scottrade customer, sued Scottrade in a putative class action alleging breaches of Missouri law (Missouri Merchandising Practices Act, common‑law fiduciary duty, unjust enrichment) for routing non‑directed limit orders to trading venues that paid rebates to Scottrade.
- Lewis alleged Scottrade prioritized venues that paid the largest rebates, did not pass those payments to customers, and thereby failed to provide "best execution."
- The action was transferred to the Eastern District of Missouri (Scottrade’s principal place of business); the district court dismissed under SLUSA for failure to state a claim.
- The Eighth Circuit reviewed de novo whether Lewis’s class claims: (1) alleged a misrepresentation/omission or a manipulative/deceptive device, and (2) did so "in connection with" purchases or sales of covered (nationally traded) securities.
- The court concluded Lewis’s allegations, fairly read, alleged material omissions or deceptive conduct in connection with covered‑security trades and therefore are precluded by SLUSA; the court affirmed dismissal.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does alleged routing that favors rebate‑paying venues fall "in connection with" purchase/sale of covered securities under SLUSA? | Lewis: Best‑execution breach that influences customers’ trading choices is not the type of conduct SLUSA reaches (e.g., choosing broker). | Scottrade: Routing decisions that affected execution of covered‑security trades are plainly "in connection with" those trades and within SLUSA. | Held: Misconduct here was "in connection with" purchases/sales of covered securities; SLUSA applies. |
| Do Lewis’s state‑law claims allege a "misrepresentation or omission" or use of a "manipulative or deceptive device" under SLUSA? | Lewis: Claims are non‑fraud fiduciary/breach claims, not based on false statements or omissions. | Scottrade: Allegations that it failed to disclose routing that sacrificed best execution and obtained rebates amount to omissions/deceptive conduct. | Held: Complaint fairly alleges material omissions or deceptive devices; SLUSA precludes the claims. |
| Does Chadbourne & Parke LLP v. Troice narrow the "in connection with" test so SLUSA doesn't apply? | Lewis: Chadbourne altered the Dabit "coincide" standard, limiting SLUSA reach. | Scottrade: Chadbourne preserved Dabit and does not exempt broker routing conduct for covered securities. | Held: Chadbourne does not change the result; Dabit’s broad construction remains applicable. |
| Should court reach federal preemption / other federal conflict arguments? | Lewis: N/A on appeal because primary issue is SLUSA applicability. | Scottrade: Alternatively argued federal regulation preempts state claims. | Held: Court did not decide preemption because SLUSA preclusion resolved the case. |
Key Cases Cited
- Dabit v. Merrill Lynch, 547 U.S. 71 (broad SLUSA "in connection with" standard; fraud need only "coincide" with securities transaction)
- S.E.C. v. Zandford, 535 U.S. 813 (flexible §10(b) "in connection with" construction; breaches coinciding with transactions meet the test)
- Chadbourne & Parke LLP v. Troice, 134 S. Ct. 1058 (clarified SLUSA requires misrepresentation/omission material to decision to buy/sell covered security; did not displace Dabit for covered‑security trading contexts)
- Kurz v. Fidelity Mgmt. & Research Co., 556 F.3d 639 (7th Cir.: best‑execution/broker misconduct is "in connection with" covered trades under Dabit)
- Siepel v. Bank of Am., N.A., 526 F.3d 1122 (8th Cir. standard for de novo review of dismissal for failure to state a claim)
- Holtz v. JPMorgan Chase Bank, N.A., 846 F.3d 928 (7th Cir.: fiduciary non‑disclosure/best‑execution failures implicate federal securities law)