Rayner v. ETrade Financial Corp.
248 F. Supp. 3d 497
S.D.N.Y.2017Background
- Plaintiff Ty Rayner, an ETRADE customer, brought a putative class action alleging ETRADE routed non-directed standing limit orders to venues that paid the largest rebates, undermining its duty of best execution.
- Claims asserted: breach of fiduciary duty, unjust enrichment, and declaratory relief seeking price-difference damages, disgorgement of commissions/rebates, injunctive relief, and an accounting.
- ETRADE disclosed it received remuneration for order routing in its Customer Agreement; plaintiff alleges ETRADE concealed that rebates influenced routing choices and harmed execution prices.
- The case was transferred from the Northern District of California to the Southern District of New York; jurisdiction under CAFA (28 U.S.C. § 1332(d)(2)).
- E*TRADE moved to dismiss under Rule 12(b)(6), arguing the Securities Litigation Uniform Standards Act (SLUSA) precludes the state-law class claims; the court granted dismissal on SLUSA grounds.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the case is precluded by SLUSA | Rayner: claims are state-law fiduciary/contractual breaches about venue selection, not securities fraud, so SLUSA doesn't apply | E*TRADE: claims depend on alleged deceptive conduct in connection with securities transactions and are thus SLUSA-precluded | Court: SLUSA precludes the claims; dismissal granted |
| Whether allegations plead a misrepresentation, omission, or deceptive device | Rayner: suit challenges inadequate venue diligence and not disclosures about kickbacks | E*TRADE: complaint alleges deceptive misrepresentations/omissions (promises of best execution while pursuing rebates) | Court: allegations amount to misrepresentations/omissions and deceptive conduct subject to SLUSA |
| Whether alleged misconduct was "in connection with" purchase/sale of covered securities | Rayner: fraud, if any, related only to broker choice, not securities transactions | E*TRADE: routing practices directly affected execution prices and coincided with trades | Court: conduct coincided with securities transactions; "in connection with" satisfied |
| Whether requested damages/disgorgement affect SLUSA analysis | Rayner: seeks disgorgement rather than typical fraud damages; limits scope | E*TRADE: disgorgement arises from routing orders and higher prices paid, thus tied to securities transactions | Court: disgorgement and price-difference damages are linked to the trades and do not avoid SLUSA preclusion |
Key Cases Cited
- In re Kingate Mgmt. Ltd. Litig., 784 F.3d 128 (2d Cir. 2015) (plaintiffs cannot evade SLUSA by pleading state-law theories when success depends on allegations of securities fraud)
- Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (2006) (fraud satisfies "in connection with" when it coincides with a securities transaction)
- Chadbourne & Parke LLP v. Troice, 571 U.S. 377 (2014) (limits on SLUSA for frauds tangential to covered securities; does not modify Dabit’s coincide standard)
- Zola v. TD Ameritrade, Inc., 172 F. Supp. 3d 1055 (D. Neb. 2016) (broker routing-rebate claims held SLUSA-precluded)
- Lewis v. Scottrade, Inc., 204 F. Supp. 3d 1064 (E.D. Mo. 2016) (similar holding that rebate-based venue-routing claims fall within SLUSA)
- In re Herald, 753 F.3d 110 (2d Cir. 2014) (distinguishing Troice and explaining SLUSA’s reach for plaintiffs who took positions in covered securities)
- Holtz v. JPMorgan Chase Bank, N.A., 846 F.3d 928 (7th Cir. 2017) (brokers’ secret side payments and failure to obtain best execution implicate securities law)
- Kurz v. Fid. Mgmt. & Research Co., 556 F.3d 639 (7th Cir. 2009) (disclosure duties about how managers discharge duties to investors fall within securities law)
- McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184 (2d Cir. 2007) (Rule 12(b)(6) standard for accepting complaint allegations as true)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility standard for pleadings)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (legal conclusions need not be accepted on a motion to dismiss)