Rayner v. ETrade Fin. Corp.
899 F.3d 117
2d Cir.2018Background
- Plaintiff Ty Rayner, on behalf of a class of ETRADE clients who placed non-directed standing limit orders, alleged ETRADE breached its duty of best execution by routing orders to venues that paid the highest rebates ("kickbacks").
- Rayner claimed this routing practice prioritized E*TRADE's revenue over client interests, causing slower fills, lower execution likelihood, and worse prices for clients.
- E*TRADE moved to dismiss, arguing the suit is precluded by the Securities Litigation Uniform Standards Act of 1998 (SLUSA).
- The district court granted dismissal under Rule 12(b)(6), holding Rayner's claims were SLUSA-precluded; Rayner appealed.
- The Second Circuit reviewed de novo whether Rayner alleged fraud (misrepresentation/omission or deceptive device) and whether any fraud was "in connection with" the purchase or sale of covered securities.
- The Second Circuit affirmed, concluding Rayner's best-execution allegations amounted to fraudulent misrepresentations/omissions and were material to clients' buy/sell decisions, so SLUSA barred the class action.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Rayner's complaint alleges fraud (misrepresentation/omission or deceptive device) | Rayner framed his claim as non-fraud fiduciary breach and not based on false statements | E*TRADE argued the complaint alleges misrepresentations/omissions and deceptive conduct (routing for kickbacks) | Held: Allegations amount to fraudulent misrepresentations/omissions and deceptive devices; SLUSA element satisfied |
| Whether the alleged fraud was "in connection with" purchase or sale of covered securities | Rayner contended SLUSA doesn't apply because any fraud did not pertain to securities transactions | E*TRADE argued routing practices affected execution price/volume and induced clients to trade under false pretenses | Held: Fraud materially affected clients' decisions to buy/sell covered securities; "in connection with" element satisfied |
| Whether artful pleading can avoid SLUSA by labeling claim as non-fraud fiduciary or contract | Rayner relied on form-over-substance pleading to avoid SLUSA | E*TRADE urged substance controls; courts should look beyond labels to the real nature of the claim | Held: Substance controls; plaintiffs cannot evade SLUSA by artful non-fraud labels when falsity is essential |
| Whether alleged misconduct by the broker (vs third parties) is precluded by SLUSA | Rayner argued Kingate supports non-preclusion where defendant need not have committed false conduct | E*TRADE noted Kingate only protected claims predicated on third-party falsity, not defendant's own fraud | Held: Kingate distinguished; where defendant itself allegedly committed deceptive acts, SLUSA applies |
Key Cases Cited
- In re Kingate Mgmt. Ltd. Litig., 784 F.3d 128 (2d Cir.) (distinguishes claims based on third-party fraud from defendant's own fraudulent conduct)
- In re Herald, 730 F.3d 112 (2d Cir.) (substance-over-form inquiry for SLUSA preclusion)
- Troice v. Proskauer Rose LLP, 571 U.S. 377 (Sup. Ct.) (limits scope of "in connection with" requirement)
- Dabit v. Merrill Lynch, Pierce, Fenner & Smith Inc., 547 U.S. 71 (Sup. Ct.) (fraudulent manipulation of prices is fraud "in connection with" securities transactions)
- Fleming v. Charles Schwab Corp., 878 F.3d 1146 (9th Cir.) (best-execution false promises can trigger SLUSA)
- Zola v. TD Ameritrade, Inc., 889 F.3d 920 (8th Cir.) (broker kickback/best-execution claims constitute securities fraud for SLUSA)