Klein v. TD Ameritrade Holding Corp.

• Decision Date: 23 October 2015
• Docket Number: 8:14CV396
• Parties: GERALD J. KLEIN, Plaintiff, v. TD AMERITRADE HOLDING CORPORATION, TD AMERITRADE, INC., and FREDRIC TOMCZYK, Defendants.
• Court: U.S. District Court — District of Nebraska

GERALD J. KLEIN, Plaintiff, v. TD AMERITRADE HOLDING CORPORATION, TD AMERITRADE, INC.,and FREDRIC TOMCZYK, Defendants.

8:14CV396

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEBRASKA

October 23, 2015

FINDINGS AND RECOMMENDATION

This matter is before the court on the defendants' Motion to Dismiss Putative Amended Class Action Complaint and Request to Take Judicial Notice (Filing No. 79). The defendants filed a brief (Filing No. 80) and a corrected index of evidence (Filing No. 93) supporting the motion. The plaintiff filed a brief (Filing No. 87) and an index of evidence (Filing No. 88) opposing the motion. The defendants filed a brief (Filing No. 94) 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 the brief rather than by filing a timely motion. See Filing No. 87 - Response p. 83.¹ Similarly, the plaintiff's request for leave to amend is denied, without prejudice for failure to comply with NECivR 15.1. Id.

BACKGROUND

The plaintiff challenges the defendants' practice of routing customers' non-directed orders to trading venues that pay the defendants the largest payments (either by liquidity rebates or order flow payments) rather than to those trading venues who will fulfill its duty of best execution. See Filing No. 75 - Amended Complaint ¶¶ 8-9. The defendants provide securities broker-dealer services as a financial services company, its parent company, and Chief Executive Officer Fredric Tomczyk (Tomczyk). Id. ¶¶ 22-24. The plaintiff, who alleges he has been the defendants' client continuously throughout the class period, "purchased shares of U.S. based exchange-listed stocks intrades" during the class period, suffering damages from the defendants' unlawful conduct. Id. ¶ 19. This plaintiff purports to represent all of the defendants' clients "who placed orders in connection with which [the defendants] received either liquidity rebates or payment for order flow." Id. ¶ 106.

The plaintiff alleges four separate claims for relief: violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (1934 Act); breach of fiduciary duty; and violations of Nebraska's Uniform Deceptive Trade Practices Act (UDTPA), Neb. Rev. Stat. §§ 87-301 to 87-306. See Filing No. 75 - Amended Complaint ¶¶ 114-139. Generally, the plaintiff alleges the defendants disseminated misleading statements to the investing public by stating the defendants would provide best execution for trade orders placed by them for clients. Id. ¶¶ 6-14. The plaintiff alleges the clients relied on such statements to their detriment because the defendants engaged in self-interested order routing for the purpose of maximizing liquidity rebates and order flow payments. Id. ¶¶ 8-9. The plaintiff further alleges the orders subject to this practice lost value "in the form of economic loss due to [the clients'] orders going unfilled, underfilled, filled at a suboptimal price, and/or filled in a manner which adversely affects the order's performance post-execution." Id. ¶¶ 13-14.

The defendants filed a motion to dismiss the plaintiff's Complaint on three grounds. See Filing No. 79. Initially, the defendants assert the plaintiff's state law 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 state law 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 of each claim. Id.

For consideration of the motion, the defendants seek judicial notice of certain sections of the Federal Register and Code of Federal Regulations. See Filing No. 79 - Motion p. 3-4. Additionally, the defendants seek judicial notice of excerpts from a June 17, 2014, transcript for a hearing before a U.S. Senate subcommittee and other materials. Id. The plaintiff does not object to taking judicial notice of these documents, which are embraced by the Complaint. See generally Filing No. 87 - Response & p. 49 n.10. In any event, as part of the court's review of the defendants' motion, the courtmay 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., 779 F.3d 727, 732 (8th Cir. 2015); see also 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. 75 - Amended Complaint ¶¶ 59-64; see also Filing No. 88-6 Ex. 1(E). The Complaint also relies upon academic research regarding order routing practices of various brokers. See Filing No. 75 - Amended Complaint ¶¶ 81-92. The defendants oppose reliance on academic research and other information referenced by the plaintiff, arguing such materials are generic and irrelevant to the plaintiff's claims. See Filing No. 80 - Brief p. 39-44.

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 disputes only whether the action alleges the defendants' conduct was "in connection with" the purchase or sale of a covered security. See Filing No. 87 - Response p. 66-70.

The plaintiff argues his action is not the type targeted by SLUSA, for example cases having a "nuisance value outweigh[ing] their merits." Id. at 66-67 (alteration in original) (quoting Dabit, 547 U.S. at 82). Moreover, the plaintiff contends his state law claims are based on misrepresentations surrounding the plaintiff's "determination to enter into a contract for and/or continue using TD Ameritrade's broker services . . . . before a single security was ever transacted." Id. at 69. Therefore, the plaintiff asserts the state law claims accrued before the defendant conducted any securities transactions, unlike claims which may stem from securities transactions. Id.

The Complaint describes the defendants as "broker[s], engag[ing] in routing . . . clients' orders to different venues to be executed." See Filing No. 75 - Amended Complaint ¶ 7. The Complaint alleges "this action for breach of fiduciary duties . . . in connection with self-interested routing of . . . clients' orders to venues which paid the maximum liquidity rebate and/or paid for order flow, irrespective of whether such routing would optimize execution quality." Id. ¶ 2. The state law claims explicitly rely upon the defendants "self-interestedly routing . . . orders to venues in order to maximize liquidity rebates and payment for order flow, thereby failing to provide best execution." Id. ¶¶ 130, 137-138.

"Under Dabit, however, 'it is enough that the fraud alleged "coincide" with a securities transaction—whether by the plaintiff or by someone else.'" Siepel v. Bank of Am., N.A., 526 F.3d 1122, 1127 (8th Cir. 2008) (quoting Dabit, 547 U.S. at 85) (concluding SLUSA prohibits "state-law claims that a trustee breached its fiduciary duty by failing to disclose conflicts of interest in its selection of nationally-traded investment securities"). The plaintiff contends a more narrow interpretation is required by Chadbourne & Parke LLP v. Troice, 134 S. Ct. 1058 (2014). See Filing No. 87 -Response p. 68. In Troice, the Court held, "[a] fraudulent misrepresentation or omission is not made 'in connection with' such a 'purchase or sale of a covered security' unless it is material to a decision by one or more individuals (other than the fraudster) to buy or to sell a 'covered security.'" Troice, 134 S. Ct. at 1066 (noting the Court "do[es] not here modify Dabit").

While the plaintiff contends his decision to associate with the defendants suffered from his reliance on fraudulent misrepresentations prior to any securities' order placement, the Complaint's allegations remain based on how the order placement materially affected and in "various ways . . . had a harmful impact on [the defendants'] clients' trades." See Filing No. 75 - Amended Complaint ¶ 138. The plaintiff's Complaint explicitly states the proposed class "suffered damages in connection with Defendants' routing...