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. e du/thir dc ir c uit_1998/22Filed January 30, 1998

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

NO. 96-5045

KENNETH E. NEWTON; MLPF&S CUST. BRUCE ZAKHEIM

IRA FBO BRUCE ZAKHEIM

v.

MERRILL, LYNCH, PIERCE, FENNER & SMITH, INC.;
PAINEWEBBER INC.; DEAN WITTER REYNOLDS (D.C. No. 94-cv-05343)

JEFFREY PHILLIP KRAVITZ

v.

DEAN WITTER REYNOLDS, INC. (D.C. No. 95-cv-00213)

MLPF&S Cust. FPO -- Bruce Zakheim IRA FBO Bruce Zakheim, Jeffrey Phillip Kravitz, and Gloria Binde r, Appellants

On Appeal From the United States District Court For the District of New Jersey

Argued October 24, 1996

BEFORE: STAPLETON and NYGAARD, Circuit Judges , and MAZZONE,* District Judge

Reargued En Banc October 29, 1997

___________________________________________________ ______________ *Hon. A. David Mazzone, United States District Judg e for the District of Massachusetts, sitting by designation.BEFORE: SLOVITER, Chief Judge, BECKER, STAPLETON,

MANSMANN, GREENBERG, SCIRICA, NYGAARD, ALITO, ROTH and LEWIS, Circuit Judges

(Opinion Filed January 30, 1998)

Norman S. Poser Brooklyn Law School
250 Joralemon Street Brooklyn, NY 11210

Karen L. Morris (Argued)
Morris & Morris

1105 North Market Street
Suite 1600 Wilmington, DE 19801 Attorneys for Appellants

Matthew D. Anhut Jonathan N. Eisenberg Kirkpatrick & Lockhart 1800 Massachusetts Avenue, N.W. Washington, D.C. 20036-5891 Attorneys for Appellee Merrill, Lynch, Pierce, Fenner & Smith, Inc.

Joseph A. Boyle Kelley, Drye & Warren 5 Sylvan Way Parsippany, NJ 07054

Bruce Coolidge Robert B. McCaw (Argued) Wilmer, Cutler & Pickering 2445 M Street, N.W. Washington, D.C. 20037-1420 Attorneys for Appellee PaineWebber, Inc.

2Frank M. Holozubiec

Kirkland & Ellis

153 East 53rd Street Citicorp Center New York, NY 10022 Attorney for Appellee Dean Witter Reynolds

Richard H. Walker Eric Summergrad Susan F. Wyderko
Jacob H. Stillman Mail Stop 6-6 Securities & Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Attorneys for Amicus Curiae Securities & Exchange
Commission

OPINION OF THE COURT

STAPLETON, Circuit Judge:

I.

Plaintiff-Appellants are investors who purchased an d sold securities on the NASDAQ market, the major electron ic market for "over-the-counter" securities, during th e two year period from November 4, 1992 to November 4, 19 94 ("the class period"). The defendants are NASDAQ mar ket makers. NASDAQ is a self-regulating market owned by the National Association of Securities Dealers ("NASD") , subject to oversight by the Securities and Exchange Commiss ion
("SEC").

An "over-the-counter" market like NASDAQ differs in important respects from the more familiar auction m arkets, like the New York and American Stock Exchanges. The NYSE and AMEX markets are distinguished by a physic al exchange floor where buy and sell orders actually"m eet," with prices set by the interaction of those orders under the

3supervision of a market "specialist." In a dealer m arket like

NASDAQ, the market exists electronically, in the fo rm of a communications system which constantly receives and reports the prices at which geographically disperse d market makers are willing to buy and sell different securi ties. These market makers compete with one another to buy and sell the same securities using the electronic syste m; NASDAQ is, then, an electronic inter-dealer quotati on system.

In a dealer market, market makers create liquidity by being continuously willing to buy and sell the secu rity in which they are making a market. In this way, an ind ividual who wishes to buy or sell a security does not have to wait until someone is found who wishes to take the oppos ite
side in the desired transaction. To account for the effort and risk required to maintain liquidity, market mak ers are allowed to set the prices at which they are prepare d to buy and sell a particular security; the difference betw een the listed "ask" and "bid" prices is the"spread" that m arket makers capture as compensation.

The electronic quotation system ties together the

numerous market makers for all over-the-counter sec urities available on NASDAQ. All NASDAQ market makers are required to input their bid and offer prices to the NASD computer, which collects the information and transm its, for each security, the highest bid price and lowest ask price currently available. These prices are called the"Na tional Best Bid and Offer," or NBBO. The NASD computer, publicly available to all NASDAQ market makers, bro kers and dealers, displays and continuously updates the NBBO for each offered security.

Plaintiffs allege that technological advances made it feasible during the class period for the defendant market makers to execute orders at prices quoted on privat e online services like SelectNet and Instinet and that those prices were frequently more favorable to their inve stor clients than the NBBO price. According to plaintiff s, the defendants regularly used these services and knew t hat prices better than NBBO were often available throug h them. Even though they knew that their investor clients e xpected them to secure the best reasonably available price,

4plaintiffs say, the defendants executed plaintiffs' orders at

the NBBO price when they knew that price was inferi or and when they, at the same time, were trading at the mo re favorable price for their own accounts. In this way , they were able to inflate their profit margins at the ex pense of their investor clients. This practice is alleged to violate section 10 of the Securities Act of 1934, 15 U.S.C. S 78j, and Rule 10b-5 promulgated thereunder, 17 C.F.R.

S 240.10b-5.

The plaintiffs also charge defendants with two othe r violations of section 10 and Rule 10b-5. Market mak ers who simultaneously hold a market order for both sid es of a transaction may obtain more favorable prices than t he NBBO by "crossing" these in-house orders. Transacti ons handled in this way are executed within the spread, giving both the purchaser and seller a better price. Simil arly, a customer order can be matched by a market maker wit h an
in-house limit order on the other side of the trans action. Since a limit order specifies a particular price at which to execute a transaction, matching another customer or der at that price may beat the currently displayed NBBO qu ote for that security. Plaintiffs allege that the failure o f the
defendants to execute orders of their clients in th ese ways when feasible constitutes a fraudulent practice bec ause, by executing at the NBBO rather than matching customer orders, the defendants capture the full market "spr ead" as a fee for their services without incurring any actu al risk in
the transaction.

II.

The defendants filed a motion to dismiss for failur e to state a claim upon which relief could be granted. A t the direction of the district court, this motion was co nverted into a motion for summary judgment, which was ultim ately granted. See In re Merrill Lynch Securities Litigat ion, 911 F. Supp. 754 (D.N.J. 1995). The district court rested its decision on two principal grounds. First, the court determined that the defendants made no misrepresent ation. Though recognizing that the defendants, by acceptin g plaintiffs' orders, impliedly represented that they intended to execute those orders in conformity with the "dut y of best

5execution," the court considered the scope of this duty

sufficiently ill-defined that execution at the NBBO could not, as a matter of law, be found inconsistent with the duty. The court concluded that in the face of uncer tainty about the scope of defendants' duty of best executi on, holding them liable would be "highly imprudent." 91 1 F. Supp. at 771. Second, the court held that, even if defendants made a material misrepresentation, they could not, as a matter of law, have acted with the requis ite
scienter.

To state a claim for securities fraud under S 10 of the Securities Act of 1934 and Rule 10b-5, plaintiffs m ust demonstrate: (1) a misrepresentation or omission of a material fact in connection with the purchase or sa le of a security; (2) scienter on the part of the defendant ; (3) reliance on the misrepresentation; and (4) damage r esulting from the misrepresentation. See Sowell v. Butcher & Singer, Inc., 926 F.2d 289, 296 (3d Cir. 1991). Because pla intiffs have demonstrated that a genuine issue of material fact
exists as to the elements of their securities fraud claim, we
will reverse the district court.

III.

The parties agree that a broker-dealer owes to the client a duty of best execution. They further agree that a brokerdealer, by accepting an order without price instruc tions, impliedly represents that the order will be execute d in a manner consistent with the duty of best execution a nd that a broker-dealer who accepts such an order while int ending to breach that duty makes a misrepresentation that is material to the purchase or sale. The parties diffe r, however, on whether a trier of fact could conclude from this record that the implied representation made by the defendants included a representation that they woul d not execute at the NBBO price when prices more favorabl e to
the client were available from sources like SelectN et and
Instinet.

As we explain hereafter, this difference can be res olved only by determining whether, during the class perio d or some portion thereof, it was feasible for the defen dants to

6execute trades through SelectNet and Instinet when prices

more favorable than the NBBO were being quoted ther e. This is a matter concerning which the record reflec ts a material dispute of fact. If such prices were reaso nably available and the defendants, at the time of accept ing plaintiffs' orders, intended to execute them solely by reference to the NBBO, they made a material misrepresentation in connection with the purchase o r sale
of the securities involved. If a finder of fact cou ld infer, in addition, that the defendants' implied representati on was knowingly false or made with reckless indifference, it would follow that summary judgment for the defendants was inappropriate.

The duty of best execution, which predates the fede ral securities laws, has its roots in the common law ag ency obligations of undivided loyalty and reasonable car e that an agent owes to his principal.1 Since it is understoo d by all that the client-principal seeks his own economic ga in and the purpose of the agency is to help the client-pri ncipal achieve that objective, the broker-dealer, absent instructions to the contrary, is expected to use re asonable
efforts to maximize the economic benefit to the cli ent in
each transaction.

The duty of best execution thus requires that a bro kerdealer seek to obtain for its customer orders the m ost

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1. See, e.g., Hall v. Paine, 112 N.E. 153, 158 (Mas s. 1916) ("broker's obligation to his principal requires him to secure the highest price obtainable"); Restatement of Agency (Second)S 424 ( 1958) (agent must
"use reasonable care to obtain terms which best sat isfy the manifested purposes of the principal"). See also Opper v. Hanc ock Securities Corp., 250 F.Supp. 668, 676 (S.D.N.Y.) ("[T]he duties of a securities broker are, if anything, more stringent than those imposed by g eneral agency law."), aff 'd, 367 F.2d 157 (2d Cir. 1966). Moreover, as t he district court correctly recognized, the best execution duty "does not dissolve when the broker/dealer acts in its capacity as a principal." 911 F.Supp. at 760. Accord E.F. Hutton & Co., Exchange Act Rel. No. 258 87, 49 S.E.C. 829, 832 (1988) ("A broker-dealer's determination to exe cute an order as principal or agent cannot be `a means by which the broker may elect whether or not the law will impose fiduciary standa rds upon him in the actual circumstances of any given relationship or t ransaction.' ") (citation omitted).

7favorable terms reasonably available under the

circumstances. See, e.g., Sinclair v. SEC, 444 F.2d 399, 400 (2d Cir. 1971) (fiduciary duty requires broker-deal er "to obtain the best available price" for customers' ord ers); Arleen W. Hughes, 27 S.E.C. 629, 636 (1948) ("A cor ollary of the fiduciary's duty of loyalty to his principal is his duty to obtain . . . the best price discoverable in the exercise of reasonable diligence."), aff 'd sub nom. Hughes v. SEC, 174 F.2d 969 (D.C. Cir. 1949). Accord Order Execution Obligations, Exchange Act Release No. 37,619A, 61 F ed. Reg. 48290, 48322 (Sept. 12, 1996) ("Final Rules"). That is, the duty of best execution requires the defendants to execute the plaintiffs' trades at the best reasonab ly available price.2 While ascertaining what prices ar e reasonably available in any particular situation ma y require a factual inquiry into all of the surrounding circu mstances, the existence of a broker-dealer's duty to execute at the best of those prices that are reasonably available is wellestablished and is not so vague as to be without ascertainable content in the context of a particula r trade or

trades.

As the SEC has recognized on a number of occasions, the scope of the duty of best execution has evolved ove r time with changes in technology and transformation of th e structure of financial markets.3 For example, befor e the

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2. Other terms in addition to price are also releva nt to best execution.

In determining how to execute a client's order, a brok er-dealer must take into account order size, trading characteristics of the security, speed of execution, clearing costs, and the cost and difficu lty of executing an order in a particular market. See, e.g., Payment fo r Order Flow, Exchange Act Release No. 33,026, 58 Fed. Reg. 52934 , 52937-38 (Oct. 13, 1993). When the plaintiffs state that better"pr ices" were reasonably available from sources other than the NBBO, we unde rstand that to mean that, given an evaluation of price as well as all of the other relevant terms, the trade would be better executed through a source of liquidity other than the NBBO (e.g. SelectNet, Inst inet, in-house limit orders or market orders held by the defendants, or limit orders placed by the public in the Small Order Execution System). Si milarly, for convenience, we use the phrases "best reasonably av ailable price" and "best terms" interchangeably.

3. See, e.g., Final Rules, 61 Fed. Reg. at 48322-23 ("The scope of this duty of best execution must evolve as changes occur in the market that

8creation of NASDAQ, a broker in an over-the-counter

market satisfied her duty of best execution by cont acting at least three market makers prior to executing a clie nt's order. See Order Execution Obligations, Exchange Ac t Release No. 36,310, 60 Fed. Reg. 52792, 52793 (Oct. 10, 1995) ("Proposed Rules"). With the advent of NASDAQ and the NBBO computer system providing instant access t o the best bid and offer available nationwide, the standa rd for satisfying the duty of best execution necessarily h eightened. After the class period, the SEC issued rules that a ltered the
definition of the NBBO to include consideration of many of the alternative sources of liquidity that plaintiff s claim should have been consulted during the class period, such as SelectNet and Instinet. See Final Rules, 61 Fed. Reg. at 48306-16. Prospectively, at least, this heightened the
standard still further.

Because the scope of the duty of best execution is constantly evolving and because the "reasonably ava ilable" component of the duty is fact dependent, broker-dea lers have long been required to conform customer order practices with changes in technology and markets. F or example, the NASD's Rules of Fair Practice, adopted in 1968, required brokers in the over-the-counter mark et to "use reasonable diligence to ascertain the best int er-dealer market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under the prevailing market conditions." NASD Manual (CCH), art. III S 1, P 215 1.03 (1995) (Interpretation A). Included in the factors used to satisfy the requirement of "reasonable diligence" a re both "the number of primary markets checked," and the "location and accessibility to the customer's broke r-dealer of primary markets and quotations sources." Id.

Almost a year before the end of the class period, t he SEC staff issued a report entitled "Market 2000: An Exa mination

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give rise to improved executions for customer order s, including opportunities to trade at more advantageous prices. As these changes occur, broker-dealers' procedures for seeking to ob tain best execution for customer orders also must be modified to consider p rice opportunities that become `reasonably available.' ").

9of Current Equity Market Developments." This report notes

that the SEC has consistently taken the position th at the evolving nature of the markets requires a broker-de aler to "periodically assess the quality of competing marke ts to ensure that its order flow is directed to markets p roviding the most advantageous terms for the customer's orde r." Market 2000 Report, 1994 SEC LEXIS 136, *11-12. As the term "periodically assess" suggests and as the SEC confirms in its amicus briefing before us, this seg ment of the report was not speaking to the issue of whether , during the class period, the duty of best execution includ ed a requirement that broker-dealers engage in an order- byorder analysis of competing markets. It does, howev er, expressly recognize a duty on the part of broker-de alers to periodically examine their practices in light of ma rket and technology changes and to modify those practices if necessary to enable their clients to obtain the bes t reasonably available prices.

The plaintiffs' orders did not specify the price at which they should be executed. It is a reasonable inferen ce that plaintiffs, in placing their orders, sought their o wn economic advantage and that they would not have pla ced them without an understanding that the defendants w ould execute them in a manner that would maximize plaint iffs' economic benefit from the trade. Given the objectiv e of the agency and the regulatory background we have review ed,
we conclude that a trier of fact could infer that t he defendants' acceptance of the orders was reasonably understood as a representation that they would not be executed at the NBBO price when better prices were reasonably available elsewhere. Accordingly, we mus t examine the record evidence relevant to whether pri ces quoted on private on-line services like SelectNet a nd Instinet were reasonably available during the class period and whether those prices were more favorable than t he NBBO when plaintiffs' orders were executed.

The evidence pointed to by plaintiffs indicates tha t (1) SelectNet and Instinet were in existence throughout the class period; (2) the quotations reported by these services reflected buyers and sellers ready to trade at the quoted prices; (3) the defendants themselves actively trad ed on

10SelectNet and Instinet during the class period; and (4) other

respected members of the brokerage community, since before the class period, have regarded these servic es as providing reasonably available prices and have exec uted orders through them when the prices reported were m ore favorable to the client than the NBBO price. In add ition, the plaintiffs have tendered expert testimony confirmin g the reasonable availability of execution sources other than the NBBO during the class period.

With respect to whether SelectNet and Instinet pric es were more favorable at the time their orders were e xecuted, plaintiffs point to an SEC study of prices during t he three month period from April through June 1994. The SEC found that "approximately 85% of the bids and offer s displayed by market makers in Instinet and 90% of t he bids and offers displayed on SelectNet were at better pr ices than those posted publicly on NASDAQ." Final Rules, 61 F ed. Reg. at 48308. Plaintiffs have also tendered eviden ce of a few trades executed for them by defendants at the N BBO where evidence of contemporaneous offers on Instine t and SelectNet indicate that lower prices were available . Plaintiffs have filed a Rule 56(f) affidavit indicating that t hey need discovery in order to provide similar evidence with respect
to the remainder of their trades.4

To be sure, the defendants, with record support, in sist that consulting other sources besides the NBBO woul d have added substantial expense and delay to the exe cution of plaintiffs' orders, more than offsetting any imp rovements that might have been available in terms of price. 5 This,

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4. Defendants suggest that the lack of evidence of injury in all plaintiffs' transactions supports an affirmance on the basis of lack of standing. We believe the evidence we have reviewed in text suppo rts plaintiffs' claim

to standing. Plaintiffs submitted evidence that would warrant a finding that
several trades were made on their behalf when bette r prices were contemporaneously available from other sources. The SEC study of 1994 prices suggests that, more likely than not, there w ere other trades in
this category. In any event, the plaintiffs have filed a Rule 56(f) affidavit

that would preclude a summary judgment for defendants on this issue at this
time.

5. In particular, the defendants rely upon the exis tence during the class period of the Small Order Execution System ("SOES") . SOES is an

11however, does nothing more than create a material d ispute

of fact which we are not permitted to resolve in fa vor of the defendants at this juncture.

We believe the evidence is sufficient to allow a re asonable trier of fact to conclude that, by the time of the class period, both technology and over-the-counter market s had developed to a point where it was feasible to maxim ize the economic benefit to the client by taking advantage of better prices than the NBBO. Summary judgment for defendan ts on this element of plaintiffs' claim was therefore not appropriate.

IV.

As we have noted, recovery on a federal securities fraud claim requires a showing of scienter: a deliberate or reckless misrepresentation of a material fact. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976); Eise nberg v. Gagnon, 766 F.2d 770, 776 (3d Cir. 1985). The alleg ed misrepresentation here is an implied representation made by the defendants when they agreed to execute the plaintiffs' orders that they intended to maximize t he

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electronic routing system that was created in 1984 to allow orders from small investors to be automatically executed at the NBBO. Defendants
claim that since the NBBO was the exclusive source for trades executed through SOES, the duty of best execution was presum ptively met for
these trades. The evidence to which the defendants point supports their position that execution at the NBBO was a common pr actice in handling orders from small investors. It does not alone, how ever, require a finding that trades at better prices through SelectNet or I nstinet were not reasonably available even for small orders or that a broker-dealer's duty of best execution was automatically discharged by e xecutions through SOES. While size is undoubtedly a relevant factor i n determining the scope of the duty of best execution, for summary ju dgment purposes we find the state of the record with respect to small orders no different

than the record with respect to other orders. The affida vit of Richard Y. Roberts, who served as the chairman of the SEC thro ughout the class period, notes that, to his knowledge, the SEC did n ot take the position that execution through SOES automatically satisfied the duty of best execution, and indicates that, in his opinion, such a position would be contrary to several SEC releases. At any rate, not all of plaintiffs'

orders were executed through SOES.

12plaintiffs' economic gain in the transaction. Since the

defendants knew of the plaintiffs' profit motivatio n, they must have understood, according to the plaintiffs, that plaintiffs would expect them to obtain a price more advantageous to the plaintiffs than the NBBO when o ne was readily available. If the defendants intended n ot to act in a manner consistent with this expectation when t hey accepted the orders and yet did not so advise plain tiffs, plaintiffs insist that the defendants can be found to have made an implied representation that they knew to be false.

We believe that a reasonable trier of fact couldfin d this chain of inferences persuasive based on a straight forward economic analysis of the plaintiffs' relationship w ith the defendants. In addition, however, plaintiffs rely u pon evidence showing that respected members of the brok erage community recognized, even prior to the class perio d, that trades were readily available from sources other th an the NBBO and that their clients expected them to take advantage of those sources whenever it would benefi t the client. See, e.g., Declaration of Paul M. Lacy [A 7 18]; Declaration of Junius W. Peake [A 755]; Declaration of Richard Y. Roberts [A 775]. Moreover, the plaintiff s have shown that an SEC study found clear evidence of a t wotiered market during the class period, in which NAS DAQ market makers routinely traded at one price with re tail clients like the plaintiffs and at a better price f or themselves through quotation services like SelectNe t and Instinet. See Final Rules, 61 Fed. Reg. at 48307-08 . They have further shown that the possibility that the du ty of best execution might require resort to sources other tha n the NBBO was being actively debated during the class pe riod and that that debate ultimately resulted, shortly a fter the class period, in a regulation effectively requiring as much.

Id.

All of this would allow a reasonable trier of fact to find that the defendants' misrepresentation--namely, tha t they would execute plaintiffs' trades in a manner maximi zing plaintiffs' economic gain--was at least reckless, i f not intentional. See Healey v. Catalyst Recovery of Pen n., Inc., 616 F.2d 641, 649 (3d Cir. 1980) (defining reckless ness as an extreme departure from ordinary care).

13Defendants have countered with affidavits of other

respected members of the brokerage community statin g that their practice during the class period was the same as that of the defendants. This evidence could, of cou rse, be regarded by a trier of fact as probative of the def endants' state of mind when they accepted plaintiffs' orders . But
these affidavits do no more than raise a material i ssue of fact as to whether the defendants knew of the expec tation plaintiffs claim to have had; they do not settle th e matter.

At trial, the defendants would certainly be entitle d to argue to the jury that, because of industry practic e, they thought their clients would expect them to execute only at the NBBO or that they never thought about their cli ents' expectations. Moreover, any evidence, derived from knowledge of industry practice or elsewhere, that t he plaintiffs were generally aware of the defendants' exclusive reliance on the NBBO would, of course, be quite pro bative of whether the plaintiffs had the expectations they claim. But the defendants, in elevating the practice of a segment of the industry to be outcome determinative, lose s ight of the fact that the basis for the duty of best execut ion is the mutual understanding that the client is engaging in the trade--and retaining the services of the broker as his agent --solely for the purpose of maximizing his own econ omic benefit, and that the broker receives her compensat ion because she assists the client in reaching that goa l. Based on this mutual understanding and the absence of any express limitations on the brokers' responsibility, a trier of fact could find that the defendants, although inten ding to execute with sole reference to the NBBO, understood that they were expected to utilize sources other than th e NBBO when a better price was readily available.6

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6. The foregoing analysis is generally applicable t o plaintiffs' claim

that it was reasonably feasible for defendants to "cross " customer orders on opposing sides of a transaction and match customer orders with inhouse limit orders. Plaintiffs' record support, inc luding affidavits from respected members of the investment community, rais es a disputed issue of material fact as to whether these practice s were reasonably feasible during the class period. If the defendants intended to execute plaintiffs' orders at the NBBO despite the reasonab le availability of

these alternative pricing sources, and if the defendants acted knowingly or with reckless indifference to the falsity of their material representations, then plaintiffs have a securities fraud claim for t hese practices as well.

14V.

In concluding as we do, we are not unmindful of the fact, deemed determinative by the district court, that ex ecution of customer orders at the NBBO was a practice "wide ly, if not almost universally followed" in the securities industry during the class period. 911 F. Supp. at 772. Under the district court's logic, a Section 10(b) defendant w ould be entitled to summary judgment even if it were her re gular practice to knowingly violate the duty of best exec ution, so long as she could identify a sufficient number of o ther broker-dealers engaged in the same wrongful conduct to be able to argue in good faith that the underlying dut y was "ambiguous." We cannot accept an analysis that woul d produce such a result.

Even a universal industry practice may still be fraudulent. See Chasins v. Smith, Barney & Co. , 43 8 F.2d 1167, 1171-72 (2d Cir. 1970) (non-disclosure of wid espread industry practice may still be non-disclosure of ma terial fact); Opper v. Hancock Securities Corp., 250 F. Su pp. 668, 676 (S.D.N.Y.) (industry custom may be found fraudu lent, especially on first occasion it is litigated) aff ' d, 367 F.2d 157 (2d Cir. 1966); see also Vermilye & Co. v. Adam s Express Co., 88 U.S. 138, 146 (1874). Indeed, the S EC recently completed an investigation in which it fou nd that certain practices by NASDAQ market makers, not at i ssue here, were fraudulent even though they were widely followed within the industry. See Report of Investi gation Pursuant to Section 21(a) of the Securities Exchang e Act of 1934 Regarding the NASD and the NASDAQ Market, 1996 SEC LEXIS 2146 (Aug. 8, 1996).

As defendants emphasize, the practice of exclusive
reliance on the NBBO has never been held to be frau dulent by any court or regulator. On the other hand, there is no statute, rule, regulation, or interpretation, by th e SEC or by a court, that authoritatively establishes that, for all trades, the NBBO exhausted the category of "reasonably avai lable prices" during the class period. This absence of pr ecedent did not, however, absolve the district court of the duty to resolve the plaintiffs' securities fraud claim once it was presented in this suit.

15"In the final analysis, ultimate responsibility for

construction and enforcement of the securities laws must rest with the court." Langert v. Q-1 Corp. , Fed. S ec. L. Rep. (CCH) P 94,445, at 95,540, 1974 WL 377 (S.D.N.Y. Ma r. 15, 1974). The district court was not deprived of this enforcement authority just because no court or regu lator had previously chosen to exercise such authority wi th respect to the practice challenged here. See, e.g., Chasins, 438 F.2d at 1171-72 (finding that defendant's failu re to
disclose its market maker status was material omiss ion under Section 10(b), despite fact that SEC had neve r previously held that such disclosure was required).

VI.

On the record before us, we believe a reasonable tr ier of fact could conclude that the defendants misrepresen ted that they would execute the plaintiffs' orders so a s to maximize the plaintiffs' economic benefit, and that this misrepresentation was intentional or reckless becau se, at the time it was made, the defendants knew that they intended to execute the plaintiffs' orders at the N BBO price even if better prices were reasonably available. A reasonable trier of fact could thus find scienter with respect to a material misrepresentation, as well as the other el ements essential to a Section 10(b) fraud claim. According ly, we will reverse the summary judgment entered by the distric t court and remand for further proceedings.

A True Copy:

Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

16