Source: https://caselaw.findlaw.com/us-8th-circuit/1885428.html
Timestamp: 2019-04-24 20:55:19+00:00

Document:
Before LOKEN, ARNOLD, and SHEPHERD, Circuit Judges. Counsel who presented argument on behalf of the appellant was Leslie E. Hurst, of San Diego, CA. The following attorneys also appeared on the appellant brief; Timothy G. Blood, Thomas Joseph O'Reardon, II, Paula R. Brown, Brian J. Robbins, Kevin A. Seely, Ashley R. Rifkin, and Leonid Kandinov, all of San Diego, CA. Counsel who presented argument on behalf of the appellee was Christopher Martin Hohn, of Saint Louis, MO. The following attorneys also appeared on the appellee brief; Thomas Edward Douglass, David Michael Mangian, and Brandi L. Burke, all of Saint Louis, MO.
Nicholas Lewis filed this putative class action against Scottrade, Inc., a securities brokerage firm, alleging violations of the Missouri Merchandising Practices Act, Mo. Rev. Stat. §§ 407.010 et seq., breach of a common law fiduciary duty, and unjust enrichment. After Lewis filed the action in the Southern District of California, it was transferred to the Eastern District of Missouri, where Scottrade's principal executive offices are located. The complaint alleges that Scottrade routinely routes customer limit orders for the purchase and sale of securities to trading venues that pay “rebates” to sending brokers, violating Scottrade's “duty of best execution” in buying and selling securities on behalf of its customers. The district court 1 dismissed the complaint, concluding that Lewis's claims are precluded by the Securities Litigation Uniform Standards Act (“SLUSA”), 15 U.S.C. § 78bb(f)(1). Lewis appeals. Reviewing the dismissal for failure to state a claim de novo, we affirm. Siepel v. Bank of Am., N.A., 526 F.3d 1122, 1124 (8th Cir. 2008).
Scottrade provides its customers online trading services, investment services, and market research tools. Its customers place orders to buy and sell individual securities. Scottrade executes the orders itself or through trading venues that include major stock exchanges, hedge funds, banks, electronic communication networks, and third-party market makers. Lewis, a Scottrade customer since 2012, has placed non-directed standing limit orders through Scottrade. In a “non-directed” order, the customer directs Scottrade to execute the order but does not specify the trading venue Scottrade should select. A “limit” order is an order to buy or sell a specific number of shares of a security at a specific or better price.
“The magnitude of the federal interest in protecting the integrity and efficient operation of the market for nationally traded securities cannot be overstated.” Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 78, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006). To further that interest, Congress enacted SLUSA, which modified the Securities Act of 1933 and the Securities Exchange Act of 1934 to “prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of” the earlier Private Securities Litigation Reform Act (“PSLRA”). Id. at 82, 126 S.Ct. 1503 (quotation omitted); see Dudek v. Prudential Secs., Inc., 295 F.3d 875, 877 (8th Cir. 2002).
In this case, it is undisputed that Lewis filed a “covered class action” and that Scottrade receives and executes on behalf of its customers orders for the purchase and sale of “covered securities.” The issues on appeal are whether Lewis's complaint alleged (1) a “misrepresentation or omission” or a “manipulative or deceptive device or contrivance” that was (2) “in connection with the purchase or sale of a covered security.” When interpreting SLUSA, we presume “Congress envisioned a broad construction, so that the most troublesome class actions [will] be subject to the PSLRA's procedural reforms.” Siepel, 526 F.3d at 1127 (quotation omitted). We “look at the substance of the allegations, based on a fair reading,” because SLUSA preclusion “is based on the conduct alleged, not the words used to describe the conduct.” Kutten v. Bank of Am., N.A., 530 F.3d 669, 670–71 (8th Cir. 2008). Like the parties and the district court, we will begin with the second issue.
Section 10(b) of the 1934 Act provides that it is unlawful to employ any manipulative or deceptive device or contrivance “in connection with the purchase or sale of any security.” 15 U.S.C. § 78j(b). The Supreme Court has long construed that provision “not technically and restrictively, but flexibly to effectuate its remedial purposes.” S.E.C. v. Zandford, 535 U.S. 813, 819, 122 S.Ct. 1899, 153 L.Ed.2d 1 (2002) (quotation omitted). In Zandford, the Court reiterated that in “a fraudulent scheme in which the securities transactions and breaches of fiduciary duty coincide”—for example, where “each sale was made to further [the] fraudulent scheme”—the breaches were “in connection with securities sales within the meaning of § 10(b).” Id. at 820, 825, 122 S.Ct. 1899. In Dabit, the Court applied that same broad interpretation to identical “in connection with” language Congress used in SLUSA. 547 U.S. at 85–86, 126 S.Ct. 1503. “Under our precedents,” the Court explained, “it is enough that the fraud alleged ‘coincide’ with a securities transaction—whether by the plaintiff or by someone else.” Id. at 85, 126 S.Ct. 1503.
Applying these precedents, we think it obvious that the misconduct alleged by Lewis was “in connection with” the purchase and sale of covered securities. Lewis argues that “SLUSA does not apply to misconduct that induces someone to select one brokerage firm over another.” But Scottrade's alleged failure to provide best execution was material to every trade in covered securities that customer Lewis chose to have Scottrade execute. The alleged misconduct—not disclosing that it would breach the duty of best execution—produced ill-gotten revenue for Scottrade each time it executed an order to buy or sell covered securities for its duped customer. We agree with the Seventh Circuit that it is “frivolous, given Dabit,” to argue that breach of the best execution duty is not in connection with the purchase or sale of securities. Kurz v. Fidelity Mgmt. & Research Co., 556 F.3d 639, 641 (7th Cir. 2009).
But wait, Lewis argues. The Supreme Court in Dabit only “indirectly discussed ‘in connection with’ under SLUSA” (a ridiculous assertion). In Chadbourne & Parke LLP v. Troice, ––– U.S. ––––, 134 S.Ct. 1058, 188 L.Ed.2d 88 (2014), the argument continues, the Supreme Court “broke new ground in illuminating the contours of the ‘in connection with’ requirement by doing away with the amorphous ‘coincide’ standard.” We disagree. In Chadbourne, plaintiffs were investors who bought uncovered securities from a Ponzi scheme ringleader. They alleged that defendants helped perpetrate the fraud by falsely claiming the uncovered securities were backed by covered securities. Id. at 1062, 1065. The Court held that transactions in uncovered securities are not in connection with the purchase of a covered security because, to be precluded by SLUSA, an alleged fraudulent misrepresentation or omission must be “material to a decision by one or more individuals (other than the fraudster) to buy or sell a covered security.” Id. at 1066 (quotation omitted). Here, of course, Scottrade's alleged misconduct induced customers to place limit orders for covered securities with Scottrade.
The Court in Chadbourne, after quoting the “coincide” standard from Dabit, expressly stated, “We do not here modify Dabit.” Id. The Court further added that “the only issuers, investment advisers, or accountants that today's decision will continue to subject to state-law liability are those who do not sell or participate in selling securities traded on U.S. national exchanges.” Id. at 1068 (emphasis in original). Thus, Chadbourne does not affect our conclusion that fraud or deception in trading that violates a broker's duty of best execution is misconduct “in connection with” the purchase and sale of covered securities to which SLUSA applies.
Missouri courts have ruled that violations of common law fiduciary obligations constitute “constructive fraud,” Klemme v. Best, 941 S.W.2d 493, 495 (Mo. banc. 1997); fiduciary duty claims “sound[ ] in fraud or deceit,” Henry v. Farmers Ins. Co., Inc., 444 S.W.3d 471, 481 (Mo. App. 2014). Of course, not all breaches of fiduciary duty necessarily fall within SLUSA. See Zandford, 535 U.S. at 825 n.4, 122 S.Ct. 1899 (“[I]f the broker told his client he was stealing the client's assets, that breach of fiduciary duty might be in connection with a sale of securities, but it would not involve a deceptive device or fraud.”). However, the core of Lewis's complaint is that Scottrade did not disclose its practice of not obtaining best execution, permitting it to acquire and retain trading venue rebates contrary to its customers' interests.
A fiduciary that makes a securities trade without disclosing a conflict of interest violates federal securities law. ․ Likewise a broker-dealer that fails to achieve best execution for a customer by arranging a trade whose terms favor the dealer rather than the client has a securities problem, not just a state-law contract or fiduciary-duty problem.
Holtz v. JPMorgan Chase Bank, N.A., 846 F.3d 928, 932 (7th Cir. 2017). Even if Lewis did not allege a false misrepresentation or omission, his allegations fairly read allege that Scottrade “employed [a] manipulative or deceptive device or contrivance.” § 78bb(f)(1)(B); see Dudek, 295 F.3d at 880.
1. The Honorable John A. Ross, United States District Judge for the Eastern District of Missouri.
2. Nearly identical provisions were added to the 1933 Act. See 15 U.S.C. §§ 77p(b), 77p(f)(2)(A), 77r(b)(1).
3. Because we conclude that SLUSA precludes Lewis's claims, we need not consider Scottrade's additional argument that Lewis's claims are preempted because they conflict with extensive federal regulation of best execution practices.

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