Rayner ex rel. Situated v. E*trade Fin. Corp.

• Decision Date: 01 April 2017
• Docket Number: 16-cv-7129 (JGK).
• Citation: 248 F.Supp.3d 497
• Parties: Ty RAYNER, on Behalf of Himself and All Others Similarly Situated, Plaintiff, v. E*TRADE FINANCIAL CORPORATION et al., Defendants.
• Court: U.S. District Court — Southern District of New York

248 F.Supp.3d 497

Ty RAYNER, on Behalf of Himself and All Others Similarly Situated, Plaintiff,

v.E*TRADE FINANCIAL CORPORATION et al., Defendants.

16-cv-7129 (JGK).

United States District Court, S.D. New York.

Signed April 1, 2017

Filed April 3, 2017

Ashley Rawlins Rifkin, Brian James Robbins, Kevin Andrew Seely, Leonid Kandinov, Kevin A. Seely, Robbins Arroyo LLP, John Kenneth Landay, Malcolm Byron Roberts, Landay Roberts LLP, Leslie Eileen Hurst, Thomas Joseph O'Reardon, II, Timothy Gordon Blood, Paula Roach Brown, Timothy G. Blood, Blood, Hurst & O'Reardon, LLP, San Diego, CA, for Plaintiff.

Faith Elizabeth Gay, Julia Marie Beskin, Marc Greenwald, Richard Corey Worcester, Faith E. Gay, Renita Nath Sharma, Quinn Emanuel Urquhart and Sullivan LLP, New York, NY, Patrick C. Doolittle, Quinn Emanuel Urquhart & Sullivan LLP, San Francisco, CA, for Defendants.

MEMORANDUM OPINION AND ORDER

JOHN G. KOELTL, District Judge:

The defendants, E*TRADE Financial Corporation ("E*TRADE Financial") and E*TRADE Securities LLC ("E*TRADE Securities") (collectively, "E*TRADE"), provide brokerage services to clients, including by routing client orders to third-party trading venues to effectuate the purchase and sale of securities. The plaintiff, Ty Rayner, on behalf of a purported class claims that E*TRADE violates its fiduciary duties to its clients by routing orders to venues based on which venue makes the largest payments to E*TRADE in exchange for the orders, whereas E*TRADE should be selecting venues based only on best execution considerations. The plaintiff has brought claims against E*TRADE for breach of fiduciary duty, unjust enrichment, and declaratory judgment. E*TRADE has moved to dismiss the claims pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure because they are precluded by the Securities Litigation Uniform Standards Act (the "SLUSA").

The plaintiff originally brought this action in the United States District Court for the Northern District of California. The action was subsequently transferred to this Court pursuant to 28 U.S.C. § 1404 on the joint stipulation of the parties.¹ See Dkt. 26. This Court has jurisdiction pursuant to 28 U.S.C. § 1332(d)(2).

The plaintiffs in a related action have brought claims pursuant to sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against E*TRADE and several individual defendants. See Schwab v. E Trade Financial Corporation, No. 16–cv–05891 (JGK) (S.D.N.Y.). Those claims are not presently before the Court.

For the following reasons, E*TRADE's motion to dismiss is granted.²

I.

In deciding a motion to dismiss pursuant to Rule 12(b)(6), the allegations in the complaint are accepted as true, and all reasonable inferences must be drawn in the plaintiff's favor. McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir. 2007). The Court's function on a motion to dismiss is "not to weigh the evidence that might be presented at a trial but merely to determine whether the complaint itself is legally sufficient." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985). The Court should not dismiss the complaint if the plaintiff has stated "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).

While the Court should construe the factual allegations in the light most favorable to the plaintiff, "the tenet that a court must accept as true all of the allegations contained in the complaint is inapplicable to legal conclusions." Id.; see also Springer v. U.S. Bank Nat'l Ass'n, No. 15-cv-1107 (JGK), 2015 WL 9462083, at *1 (S.D.N.Y. Dec. 23, 2015). When presented with a motion to dismiss pursuant to Rule 12(b)(6), the Court may consider documents that are referenced in the complaint, documents that the plaintiff relied on in bringing suit and that are either in the plaintiff's possession or that the plaintiff knew of when bringing suit, or matters of which judicial notice may be taken. Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002).

II.

The allegations in the Complaint are accepted as true for the purposes of this motion to dismiss.

E*TRADE Financial Corporation is a Delaware corporation, with its principal place of business in New York, that provides brokerage and related services to individual retail investors. Compl. ¶ 7. E*TRADE Securities is a Delaware limited liability company that is an indirect, wholly owned subsidiary of E*TRADE Financial. Compl. ¶ 8. E*TRADE Securities is a broker-dealer registered with the Securities and Exchange Commission, and is the primary provider of brokerage products and services to E*TRADE Financial's customers. Compl. ¶ 8.

Brokers, such as E*TRADE, can route orders to third-party venues, such as the New Yok Stock Exchange, hedge funds, or banks. Compl. ¶ 9. A "non-directed, standing limit order" is a standard type of order that a client can place with E*TRADE. Compl. ¶ 1 & n.1. "Non-directed" means that E*TRADE (as opposed to the client) chooses the trading venue for the order. Compl. ¶ 1 n.1. "Limit" is an instruction to buy or sell at, or better than, a specified price. Compl. ¶ 1 n.1. "Standing" means that the order will remain with the venue until it is canceled or executed, or until it expires. Compl. ¶ 1 n.1.

The Complaint alleges that, under the "maker-taker" model, venues make payments to brokerage firms, such as E*TRADE, in exchange for order flow. Compl. ¶ 10. The Complaint pejoratively characterizes these payments or rebates as "kickbacks." See, e.g., Compl. ¶¶ 1, 10. Under the maker-taker model, venues pay brokerage firms for sending (in other words, "making") orders to the venues, while venues charge brokers an access or "take" fee for "taking" the orders. Compl. ¶ 10. The Complaint alleges that venues compete for order flow by maximizing payment amounts to brokers. Compl. ¶ 10.

The Complaint alleges that E*TRADE owes its clients a "duty of best execution," meaning that E*TRADE should endeavor to obtain the best price possible for its clients when making venue routing selections. Compl. ¶¶ 15–17, 19. The Complaint alleges that relevant factors for E*TRADE's choice of venue must include the "likelihood of execution, speed of execution, and price improvement opportunity." Compl. ¶ 18. The Complaint alleges that the duty of best execution is "rooted in common law agency principles of undivided loyalty and reasonable care" that "predate[ ] federal securities laws." Compl. ¶ 16. The Complaint alleges that E*TRADE publically touts that it "do[es] everything possible to seek best execution each and every time [a client] trade[s]." Compl. ¶ 17.

According to the Complaint, the maker-taker model creates perverse incentives that conflict with E*TRADE's duty of best execution to its clients. Compl. ¶¶ 10, 12–14. Rather than routing non-directed, standing limit orders in accordance with its duty of best execution, the Complaint alleges that E*TRADE routes those orders to the venues that make the highest payments to maximize "kickback" revenue, regardless of best execution considerations. Compl. ¶¶ 21–35. The Complaint alleges that, in 2012 and 2013, E*TRADE illicitly earned over $100 million in breach of its fiduciary duties to its clients, earnings that E*TRADE does not pass on to its clients. See Compl. ¶ 11, 30.

The plaintiff has been a client of E*TRADE since approximately 2006, and placed non-directed, standing limit orders with E*TRADE as recently as January 2014. Compl. ¶ 6. The relationship between the plaintiff and E*TRADE is governed by a Customer Agreement.³ It is undisputed that, during the relevant period, E*TRADE disclosed to the plaintiff that it was receiving "remuneration" in exchange for routing orders to venues. See Customer Agreement § 6(n).

The maker-taker model, including the receipt of payments, is heavily regulated by the federal securities regime. See, e.g., Regulation NMS, Exchange Act Release No. 34–51808, 2005 WL 1364545 (June 9, 2005). The plaintiff does not allege that the receipt of such payments is inherently wrongful. Compl. ¶ 36. Rather, the Complaint alleges that E*TRADE victimized the plaintiff by prioritizing the receipt of rebates in routing his orders in violation of its duty of best execution, which resulted in the plaintiff's receipt of worse execution prices for those orders. Compl. ¶¶ 6, 46–48.

The plaintiff has brought claims for breach of fiduciary duty, unjust enrichment, and declaratory judgment seeking (1) damages for the difference between the price at which the securities transactions at issue were executed and the price at which they would have been executed had E*TRADE complied with its duty of best execution, Compl. ¶¶ 47–48; (2) disgorgement of the commissions and rebates E*TRADE "obtained in connection with routing the orders at issue," Compl. ¶ 54; (3) injunctive relief and an accounting, Compl. ¶ 49; and (4) a declaration that E*TRADE is violating its duty of best execution under state law, Compl. ¶¶ 56–57.

III.

The SLUSA provides that "[n]o covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging—(A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security; or (B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security." 15 U.S.C. § 78bb(f)(1) ; see also Romano v. Kazacos, 609 F.3d 512, 519 (2d Cir. 2010). The SLUSA thus precludes actions that satisfy the following five elements: (1) a covered class action; (2) based on state law claims; (3)...