Verdieck v. TD Ameritrade, Inc.

TYLER VERDIECK, Plaintiff, v. TD AMERITRADE, INC., Defendant.

8:14CV289

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEBRASKA

August 17, 2015

FINDINGS AND RECOMMENDATION

This matter is before the court on the defendant's Motion to Dismiss the Putative Class Action Complaint and Request to Take Judicial Notice (Filing No. 44). The defendant filed a brief (Filing No. 45) and an index of evidence (Filing No. 46) supporting the motion. The plaintiff filed a brief (Filing No. 48) opposing the motion. The defendant filed a brief (Filing No. 51) in reply. The plaintiff's request for oral argument is denied as unnecessary and for failure to comply with NECivR 7.1(d) by including the request in a footnote rather than by filing a timely motion. See Filing No. 48 - Response p. 8 n.1.¹

BACKGROUND

The plaintiff challenges the defendant's practice of routing "virtually 100% of all" customers' non-marketable limit orders (NMLOs) to a particular execution venue for trading based on maximizing the payment for order flow income the defendant received, rather than its best execution obligations. See Filing No. 1 - Complaint p. 1-2, 5-6. The plaintiff alleges the defendant's routing practice constitutes a breach of fiduciary duty. Id. at 2-3. The defendant is a securities retail broker-dealer specializing in "mom and pop" investors. Id. ¶¶ 10-11. The plaintiff was the defendant's customer, executing as least one NMLO through the defendant during the period August 1, 2011, to the present. Id. ¶ 4. This plaintiff purports to represent all of the defendant's retail clients who placed NMLOs executed on the Direct Edge exchange during the period August 1, 2011, to the present. Id. ¶¶ 57 and 59.

The plaintiff alleges a claim for breach of fiduciary duty of best execution and, as a separate but derivative claim, seeks declaratory relief. See Filing No. 1 - Complaint p. 22-24. The plaintiff alleges the breach caused him to suffer economic injury in the amount of a fixed commission fee paid to the defendant without the benefit of the defendant implementing the fiduciary duty. Id. at 23-24. The plaintiff further alleges he was damaged in an amount to be proved at trial for the lost economic benefit available to the NMLOs. Id. at 24. The plaintiff describes such loss as failure to receive the best execution of his trade and being placed in "the least preferential trading position" compared to trades executed through market centers with lower or no rebates and corresponding order fees. Id. at 7-9 and ¶¶ 56 and 73. In turn, the trading position and practices expose these orders to "toxic [high frequency traders'] strategies designed to take advantage of unsophisticated retail order flow" causing class member orders to "tend to miss execution at the expected time and/or price." Id. ¶¶ 39 and 41. Based on the alleged "abuse of its agency relationship" and unjust enrichment, the plaintiff seeks a constructive trust over the rebate money received by the defendant from Direct Edge of approximately $500 million. Id. ¶ 76.

The defendant filed a motion to dismiss the plaintiff's Complaint on three grounds. See Filing No. 44. Initially, the defendant asserts the plaintiff's claims are preempted by the Securities Litigation Uniform Standards Act of 1998 (SLUSA), 15 U.S.C. §§ 77p, 78bb(f). Id. Alternatively, the defendant argues the plaintiff's claims are preempted by federal regulation. Id. Finally, the defendant contends the plaintiff's Complaint fails to state a claim for relief on the merits. Id.

For consideration of the motion, the defendant seeks judicial notice of certain sections of the Federal Register and Code of Federal Regulations. See Filing No. 44 - Motion p. 2. Additionally, the defendant seeks judicial notice of excerpts from a June 17, 2014, transcript for a hearing before a U.S. Senate subcommittee. Id. The plaintiff does not object to taking judicial notice of these documents, which are embraced by the Complaint. In any event, as part of the court's review of the defendant's motion, the court may consider exhibits annexed to the Complaint or incorporated by reference. See Fed. R. Civ. P. 10(c) ("A copy of any written instrument which is an exhibit to a pleading is a part thereof for all purposes."); Zayed v. Associated Bank, N.A., 779F.3d 727, 732 (8th Cir. 2015); see SEC v. Siebel Sys., Inc., 384 F. Supp. 2d 694, 699 n.6 (S.D.N.Y. 2005) (taking judicial notice of transcripts relied upon by complaint). The court takes judicial notice of the exhibits identified not for the truth of the facts asserted therein, but solely to determine the content of the testimony and regulations.

The plaintiff's Complaint relies on sources other than the plaintiff's personal knowledge for many of the allegations. The Complaint references testimony given by Steven Quirk (Quirk), a senior executive for the defendant, and others before the U.S. Senate's Permanent Subcommittee on Homeland Security and Governmental Affairs, on June 17, 2014. See Filing No. 1 - Complaint p. 13-14; see also Filing No. 46-2 Ex. 1(A). During the hearing, a senator referenced academic research upon which the Complaint also relies. See Filing No. 1 - Complaint p. 10-13. The defendant opposes reliance on the academic research referenced by the plaintiff, arguing the research is generic and irrelevant to the plaintiff's claims. See Filing No. 45 - Brief p. 48-49.

ANALYSIS

A. SLUSA Preemption

The court reviews dismissal of a state law claim based on SLUSA preemption as a dismissal for failure to state a claim. Kutten v. Bank of Am., N.A., 530 F.3d 669, 670 (8th Cir. 2008); see In re Kingate Mgmt. Ltd. Litig., 784 F.3d 128, 135 n.11 (2d Cir. 2015) (noting SLUSA preclusion reviewed under Rule 12(b)(6)). Congress intended SLUSA, an amendment to the Securities Act of 1933 and the Securities Exchange Act of 1934, to preempt claims by plaintiffs eluding Federal law requirements and protections by filing specified types of actions in State court. Sofonia v. Principal Life Ins. Co., 465 F.3d 873, 876 (8th Cir. 2006) (citing H.R. Rep. No. 105-803 (Oct. 9, 1998) (Conf. Rep.)). Specifically, Congress sought to curb perceived abuses of class action cases involving securities and enforce heightened pleading requirements. Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit 547 U.S. 71, 81-82 (2006). Accordingly, SLUSA allows removal and "expressly preempts all state law class actions based upon alleged untrue statements or omissions of a material fact, or use of a manipulative or deceptive device or contrivance, in connection with the purchase or sale of a covered security." Dudek v. Prudential Sec., Inc., 295 F.3d 875, 879 (8th Cir.2002); see 15 U.S.C. §§ 77p(b)-(c), 78bb(f)(1)-(2). The plaintiff concedes he disputes only two elements: whether the action alleges the defendant (i) misrepresented or omitted a material fact or (ii) used or employed a manipulative or deceptive device or contrivance and whether the defendant's conduct was in connection with the purchase or sale of a covered security. See Filing No. 48 - Response p. 15.

The plaintiff contends his claims are consumer protection claims and he does not allege fraudulent misrepresentation or omission, but to the extent the Complaint contains such allegations they are, at best, merely extraneous detail. Id. at 8, 15-16. In opposition, the defendant argues, although the plaintiff denies he alleges misrepresentations or omissions, the breach of fiduciary duty claim involves misrepresentations or omissions, in substance. See Filing No. 45 - Brief p. 30-32. Specifically, the defendant contends the plaintiff's allegations surround misrepresentations about the factors the defendant would consider when routing orders and manipulative and deceptive trading practices. Id. at 31-32. The defendant also relies on the plaintiff's use of terms indicating the defendant engaged in conscious wrongdoing in pursuit of rebates when it "devised an order routing strategy" to "predetermined venues" which routing resulted in "enabling predatory" and "abusive" trading where the plaintiff was at an "informational disadvantage" and "tend[ed] to miss execution at the expected time and/or price." Id. at 30 (quoting Filing No. 1 - Complaint ¶¶ 1, 2, 41, 45-46, 70-71); Filing No. 51 - Reply p. 3-4. Additionally, the plaintiff alleges the defendant "should have known" about Direct Edge's practices which were "based on information known in the industry." See Filing No. 45 - Brief p. 31 (quoting Filing No. 1 - Complaint ¶ 56).

The court evaluates SLUSA applicability by employing a fair reading of the substance of the plaintiff's allegations, rather than merely the name of the cause of action. Kutten, 530 F.3d at 670; Dudek, 295 F.3d at 879 (upholding preemption dismissal when, although fraud allegations deleted, the "essence" and "substance" of the plaintiffs' fairly read complaint alleged misstatements and omissions). Further, the court must focus on material facts, those which are factual predicates of the claim. LaSala v. Bordier et Cie, 519 F.3d 121, 141 (3d Cir. 2008). "To be a factual predicate, the fact of a misrepresentation must be one that gives rise to liability, not merely anextraneous detail." Id. (noting allegation of misrepresentation may be implicit or explicit). "[W]hen one of a plaintiff's necessary facts is a misrepresentation, the plaintiff cannot avoid SLUSA by merely altering the legal theory that makes that misrepresentation actionable." Id. (noting SLUSA preemption may apply "even if misrepresentation is not a legal element of the claim"); see In re Kingate, 784 F.3d at 140 (stating "plaintiffs should not be permitted to escape SLUSA by artfully characterizing a claim as dependent on a theory other than falsity when falsity nonetheless is essential to the claim, such as by characterizing a claim of falsity as a breach of the contractual duty of fair dealing").

The plaintiff fails to cite a single case holding a breach of fiduciary duty claim may...