*In determining whether SLUSA applies, a court looks at the substance of the allegations, based on a fair reading of them. **The failure to provide best execution is a manipulative, deceptive or otherwise fraudulent device in connection with the purchase or sale of securities and is preempted by SLUSA.
Zola vs. TD Ameritrade, Inc., Nos. 14CV288, 14CV289, 14CV325, 14CV341 & 14CV396 (D. Neb., 3/23/16).
Five Class Actions
These five class actions challenge TD Ameritrade’s alleged practice of routing virtually all of its customers’ orders and trades in contravention of its purported duties and contractual obligations of best execution. All five actions were commenced by customers of TD Ameritrade and each case involved allegations that TD Ameritrade failed to seek best execution because it routed orders to exchanges and market centers that provided payment for order flow. Each of the Plaintiffs asserts substantially similar state law claims. Only Klein asserts a federal securities fraud claim, violation of §10b and Rule 10b-5. The magistrate judge recommended granting the motions to dismiss all of Plaintiffs’ state law claims as preempted under SLUSA and granting the motion to dismiss Klein’s federal securities law claim for failure to state a claim (see SLA 2015-41).
The State Law Claims
The Court finds that the magistrate judge’s recommendations should be adopted in part and denied in part. Regarding the state law claims, the Court does not rely on the names of the causes of action that the plaintiff alleges but, rather, looks at the substance of the allegations, based upon a fair reading of them. SLUSA preemption is based upon the conduct alleged, not the words used to describe the conduct. Here, each of the state law claims in Plaintiffs’ respective complaints stems from TD Ameritrade’s allegedly deceptive conduct. Material misrepresentations and omissions serve as a factual predicate for all of the state law class action claims. The failure to provide best execution is a manipulative, deceptive or otherwise fraudulent device. As a result, all the state law claims must be dismissed as precluded under SLUSA.
Rule 10b-5 Rules
Regarding the federal securities law claims, the Court disagrees with the magistrate judge’s findings that the allegations were insufficient to state a claim. Applying the heightened pleading standards of the PSLRA, the Court finds that Klein states a claim for securities fraud under §10(b) and Rule 10b-5. He specified the statements alleged to have been misleading and set forth the reasons why those statements were misleading. He alleged facts from which scienter could be inferred. He plausibly stated that members of the punitive class suffered economic loss traceable to the misrepresentations. And he plausibly alleged that order routing payments were the most significant factor in determining where TD Ameritrade routed orders and presented plausible empirical allegations showing that it was unlikely that a single venue could always provide its customers with the best execution while coincidentally obtaining for itself the highest order for payment.
(SLC Ref. No. 2016-27-05)
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