17‐1487
Rayner v. E*TRADE Financial Corp.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
August Term 2017
(Argued: December 7, 2017 Decided: July 31, 2018)
No. 17‐1487
––––––––––––––––––––––––––––––––––––
TY RAYNER, on Behalf of Himself and All Others Similarly Situated,
Plaintiff‐Appellant,
‐v.‐
E*TRADE FINANCIAL CORPORATION, E*TRADE SECURITIES LLC,
Defendants‐Appellees.
––––––––––––––––––––––––––––––––––––
Before: CABRANES, LIVINGSTON, Circuit Judges, AND GOLDBERG, Judge.*
Plaintiff‐Appellant Ty Rayner (“Rayner”), on behalf of himself and all others
similarly situated, appeals from an April 4, 2017 judgment of the United States
District Court for the Southern District of New York (Koeltl, J.), which granted a
motion to dismiss filed by Defendants‐Appellees E*TRADE Financial Corporation
and E*TRADE Securities LLC (collectively, “E*TRADE”). Rayner argues on
appeal that the district court erred in determining that his state law claims,
* Judge Richard W. Goldberg, of the United States Court of International Trade,
sitting by designation.
alleging that E*TRADE violated its duty of best execution, are precluded by the
Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), 15 U.S.C.
§ 78bb(f). For the reasons set forth below, we conclude that Rayner’s arguments
lack merit. Accordingly, we AFFIRM the judgment of the district court.
FOR PLAINTIFF‐APPELLANT: LESLIE E. HURST (Timothy G. Blood, Paula R.
Brown, on the brief), Blood Hurst &
O’Reardon, LLP, San Diego, CA.
Brian J. Robbins, Kevin A. Seely, Ashley R.
Rifkin, Leonid Kandinov, Robbins Arroyo
LLP, San Diego, CA.
FOR DEFENDANTS–APPELLEES: COREY WORCESTER (Faith E. Gay, Marc L.
Greenwald, on the brief), Quinn Emanuel
Urquhart & Sullivan, LLP, New York, NY.
DEBRA ANN LIVINGSTON, Circuit Judge:
Plaintiff‐Appellant Ty Rayner (“Rayner”) filed a class action complaint (the
“Complaint”) raising state law claims against Defendants‐Appellees E*TRADE
Financial Corporation and E*TRADE Securities LLC (collectively, “E*TRADE”).
Rayner’s claims for breach of fiduciary duty, unjust enrichment, and declaratory
relief were each based on the same allegation that E*TRADE violated its duty of
best execution.
The United States District Court for the Southern District of New York
(Koeltl, J.) dismissed all of Rayner’s claims pursuant to Rule 12(b)(6) of the Federal
Rules of Civil Procedure. See Rayner v. E*TRADE Fin. Corp., 248 F. Supp. 3d 497
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(S.D.N.Y. 2017). For the reasons set forth below, we conclude that the district
court properly dismissed Rayner’s claims because they are precluded by the
Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), 15 U.S.C.
§ 78bb(f). Accordingly, we affirm the judgment of the district court.
BACKGROUND1
E*TRADE provides brokerage and related services to individual retail
investors. Clients place orders to buy and sell securities with E*TRADE, and then
E*TRADE executes those orders by delivering them to trading venues such as
stock exchanges, hedge funds, banks, electronic communications networks, and
third‐party market makers. One such client, Rayner, placed a non‐directed,
standing limit order as recently as January 2014, and E*TRADE executed that order
on his behalf. A “limit order” is “an order to buy or sell a stock at a specified
price . . . or better.” J.A. 9 n.1. Rayner’s order remained “standing” until
E*TRADE executed the order by (1) placing the order with a trading venue; and
(2) the trading venue actually purchased or sold the security. Because the order
was “non‐directed,” E*TRADE retained discretion to choose the trading venue for
The facts presented here are drawn from the allegations in Rayner’s Complaint,
1
which we accept as true for purposes of reviewing a motion to dismiss. See Stratte‐
McClure v. Morgan Stanley, 776 F.3d 94, 97 n.1 (2d Cir. 2015).
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executing Rayner’s order. But E*TRADE’s discretion to choose trading venues is
guided by its duty of best execution. And indeed, E*TRADE promises clients that
it will “do everything possible to seek best execution each and every time [a client]
trade[s]” in order to “find the right blend of execution price, speed, and price
improvement.” Id. at 13 (quoting E*TRADE’s website).
On March 25, 2015, Rayner filed the Complaint on behalf of himself and
other E*TRADE clients who have placed non‐directed, standing limit orders.
Specifically, Rayner complains that, in breach of its duty of best execution,
E*TRADE prioritizes choosing the trading venues that are willing to pay the
largest “kickbacks” in exchange for order flow. 2 Such a practice creates a
“conflict of interest between [E*TRADE] and [its] clients . . . by incentivizing
[E*TRADE to choose trading venues] that may be most cost‐effective for
[E*TRADE], but which may not be the best method of execution for [its] clients.”
Id. at 12 (quoting “[m]arket experts [that] acknowledge that the maker‐taker
system sets up financial incentives that can cause brokers to act to the detriment
of their retail investor clients”). E*TRADE’s clients are harmed when limit orders
2 Under the “maker‐taker” system, a trading venue will pay E*TRADE a rebate
whenever E*TRADE executes an order with that trading venue. Rayner refers to these
rebates as “kickbacks.” Id. at 11–12.
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are routed to trading venues that pay higher kickbacks because, according to
Rayner, such orders are “up to 25% less likely to be executed,” and more likely to
“trade when the market price is becoming worse.” Id. at 19. Instead of ensuring
that its clients can purchase and sell securities at the optimal price and volume,
E*TRADE allegedly violates its duty of best execution by seeking to maximize its
own revenue from “kickbacks.”
E*TRADE filed a motion to dismiss, arguing inter alia that Rayner’s class
action suit is precluded by SLUSA. In response, Rayner argued that SLUSA
preclusion does not apply because (1) his Complaint does not allege that E*TRADE
made a misrepresentation or omission, or employed any manipulative or
deceptive device; and (2) even assuming that the Complaint alleges fraud, any
such fraud was not “in connection with” the purchase or sale of covered securities.
In a memorandum opinion and order dated April 1, 2017, the district court granted
E*TRADE’s motion to dismiss, concluding that “[Rayner’s] arguments against
preclusion are unpersuasive.” Rayner, 248 F. Supp. 3d at 502.
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DISCUSSION
I. Standard of Review
“We review the district court’s grant of a Rule 12(b)(6) motion to dismiss de
novo, accepting all factual claims in the complaint as true, and drawing all
reasonable inferences in the plaintiff’s favor.” In re Kingate Mgmt. Ltd. Litig., 784
F.3d 128, 135 n.11 (2d Cir. 2015) (quoting In re Herald (Herald I), 730 F.3d 112, 117
(2d Cir. 2013)). “To survive a motion to dismiss, a complaint must contain
sufficient factual matter, accepted as true, to state a claim to relief that is plausible
on its face.” Id. (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)).
II. SLUSA Preclusion
SLUSA precludes private parties from filing in federal or state court (1) a
covered class action (2) based on state law claims, (3) alleging that defendants
made “a misrepresentation or omission of a material fact” or “used or employed
any manipulative or deceptive device or contrivance” (4) “in connection with” the
purchase or sale of (5) covered securities. 15 U.S.C. § 78bb(f)(1); see also Romano
v. Kazacos, 609 F.3d 512, 518 (2d Cir. 2010); Brown v. Calamos, 664 F.3d 123, 124 (7th
Cir. 2011) (“SLUSA is designed to prevent plaintiffs from migrating to state court
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in order to evade rules for federal securities litigation in the Private Securities
Litigation Reform Act of 1995 . . . .” (internal quotation marks omitted)).
There is no dispute that Rayner filed a covered class action based on state
law claims involving covered securities. We therefore focus our analysis below
on the third and fourth elements of SLUSA preclusion: First, whether Rayner has
alleged fraud in the form of “a misrepresentation or omission of a material fact”
or use of a “manipulative or deceptive device or contrivance,” and second, if so,
whether that alleged fraud is “in connection with” the purchase or sale of covered
securities.
In assessing whether Rayner’s allegations fall within the ambit of SLUSA,
we emphasize substance over form. “Since SLUSA requires our attention to both
the pleadings and the realities underlying the claims, plaintiffs cannot avoid
SLUSA merely by consciously omitting references to securities or to the federal
securities law.” Herald I, 730 F.3d at 119 (quoting Romano, 609 F.3d at 523)
(internal quotation marks omitted); see also Fleming v. Charles Schwab Corp., 878 F.3d
1146, 1153 (9th Cir. 2017) (“[W]e must determine if the Plaintiffs’ claims, stripped
of formal legal characterization, could have been pursued under § 10(b) and Rule
10b‐5.”); Holtz v. JPMorgan Chase Bank, N.A., 846 F.3d 928, 930–31 (7th Cir.)
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(“[SLUSA] is designed to prevent persons injured by securities transactions from
engaging in artful pleading . . . in order to evade limits on securities litigation that
are designed to block frivolous or abusive suits. . . . Allowing plaintiffs to avoid
[SLUSA] by contending that they have ‘contract’ claims . . . would render [SLUSA]
ineffectual, because almost all federal securities suits could be recharacterized as
contract suits about the securities involved.”), cert. denied, 138 S. Ct. 170 (2017).
III. Fraudulent Conduct
We agree with the district court that, as to the third element, the gravamen
of Rayner’s Complaint is that E*TRADE made “material misrepresentations and
omissions that were designed to induce clients to execute non‐directed, standing
limit orders with E*TRADE even though E*TRADE allegedly had no intention of
fulfilling its purported fiduciary obligations.” Rayner, 248 F. Supp. 3d at 502.
Rayner describes his “breach of duty claim [as] based on E*TRADE’s breach of a
non‐fraud based fiduciary duty.” Pl.‐Appellant Br. 15 (emphasis added). But
“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 . . . .” In re Kingate, 784 F.3d at 140.
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Here, the substance of Rayner’s Complaint plainly alleges fraudulent
conduct. According to Rayner, E*TRADE promises that it will provide best
execution for its client’s limit orders by “put[ting] the interests of its customers
ahead of its own . . . so that the resultant price to the customer is as favorable as
possible.” J.A. 13. When clients place limit orders with E*TRADE, they expect
that E*TRADE will help them “buy or sell a stock at a specified price . . . or better.”
Id. at 9 n.1 (emphasis added). On its website, E*TRADE also announces that “we
do everything possible to seek best execution each and every time you trade” in
order to deliver “the right blend of execution price, speed, and price
improvement.” Id. at 13. Despite these representations (i.e., through
“misrepresentation[s] . . . of a material fact”), Rayner alleges that E*TRADE
violated its best execution duty by placing its own interests first and routing
clients’ trades to the trading venues that paid the highest “kickbacks” (i.e., by use
of a “manipulative or deceptive device”). As a result, instead of delivering
optimal execution prices and price improvement in executing its clients’ limit
orders, E*TRADE was “more likely to trade when the price move[d] against [its
clients] and less likely to trade when prices move[d] in their favor.” Id. at 20.
The fact that the “resulting market price” would be more unfavorable than
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expected as a result of E*TRADE’s routing practice was “not known to Rayner” or
other clients at the time that they decided to purchase or sell the securities through
E*TRADE—Rayner was therefore induced by an “omission of a material fact” to
purchase and sell securities through E*TRADE. Pl.‐Appellant Reply Br. 13.
And likewise, rather than speedily purchasing and selling securities for its clients,
and unbeknownst to those clients, the limit orders that E*TRADE executed on their
behalf were “fill[ed] slower,” J.A. 18, and “up to 25% less likely to be executed,”
id. at 19.
Rayner argues nonetheless that the district court failed to follow this Court’s
precedent because “[a]s in In re Kingate, [Rayner’s] claims do not require a showing
of false conduct by the named defendants.” Pl.‐Appellant Br. 15 (quoting In re
Kingate, 784 F.3d at 152) (internal quotation marks and brackets omitted). This
argument is meritless. In re Kingate held that some of plaintiffs’ breach of
fiduciary duty claims were not precluded by SLUSA because the false conduct at
issue in that case was committed by third parties rather than by defendants. 784
F.3d at 149 (“SLUSAʹs preclusion applies when the state law claim is predicated
on conduct of the defendant . . . .” (emphasis in original)). Here, in contrast,
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Rayner’s Complaint alleges false conduct on the part of E*TRADE, not third
parties.
Accordingly, we join our sister circuits in concluding that best execution
claims alleging misrepresentations or omissions relating to: (1) a broker’s receipt
of “kickbacks” from trading venues; and (2) the execution of trades so as to take
advantage of such arrangements, satisfy the third element of SLUSA, by alleging
securities claims based on fraudulent conduct. See Zola v. TD Ameritrade, Inc., 889
F.3d 920, 923–25 (8th Cir. 2018); Lewis v. Scottrade, Inc., 879 F.3d 850, 854–55 (8th
Cir. 2018); Fleming, 878 F.3d at 1154–55; cf. Holtz, 846 F.3d at 932 (“A fiduciary that
makes a securities trade without disclosing a conflict of interest violates federal
securities law . . . [and] a broker‐dealer that fails to achieve best execution for a
client 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.”); In
re Morgan Stanley & Co. Inc., Exchange Act Release No. 55726, 2007 WL 1364323, at
*8 (May 9, 2007) (“Failure to satisfy the duty of best execution may constitute a
violation of Section 15(c)(1)(A) of the Exchange Act, which makes it unlawful for
any broker or dealer to effect any transaction in . . . any security by means of any
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manipulative, deceptive, or other fraudulent device or contrivance.” (internal
quotation marks omitted)).
III. “In Connection With”
As to SLUSA’s fourth element, we also agree with the district court that
E*TRADE’s alleged fraudulent conduct arose “in connection with” the purchase
or sale of covered securities. To satisfy this element, “the fraud perpetrated by
[E*TRADE must be] material to a decision by one or more individuals (other than
the fraudster) to buy or to sell a covered security.” In re Herald (Herald II), 753
F.3d 110, 113 (2d Cir. 2014) (per curiam) (quoting Chadbourne & Parke LLP v. Troice,
571 U.S. 377, 387 (2014) (internal quotation marks omitted). As discussed above,
E*TRADE’s fraudulent failure to provide best execution allegedly caused Rayner
and other E*TRADE clients to purchase and sell securities at unfavorable prices
and at lower volumes than expected. It is frivolous to suggest that negatively
influencing the price and quantity at which clients may buy and sell securities
would not “make[] a significant difference to someone’s decision to purchase or to
sell a covered security.” Troice, 571 U.S. at 387; see also Merrill Lynch, Pierce, Fenner
& Smith Inc. v. Dabit, 547 U.S. 71, 89 (2006) (“[F]raudulent manipulation of stock
prices—unquestionably qualifies as fraud ‘in connection with the purchase or sale’
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of securities . . . .”); Kurz v. Fid. Mgmt. & Research Co., 556 F.3d 639, 641 (7th Cir.
2009) (rejecting as “frivolous” the argument that “the duty of best execution is not
‘in connection with the purchase or sale’ of securities”).
The ”outer limit” delineated by the Supreme Court in Troice does not
suggest a contrary result. Herald II, 753 F.3d at 113 (“Troice clarifies the scope of
SLUSA by delineating an outer limit to its requirement that the fraud be ‘in
connection with the purchase or sale of a covered security.’”). As we explained
in Herald II, the Supreme Court held that “the closest that the plaintiffs in Troice
could get” to satisfying the “in connection with” requirement was the “too
remote” allegation that the plaintiffs were induced to purchase uncovered (not
covered) securities, as a result of the defendants’ fraudulent representations that
the defendants (not the plaintiffs) would purchase covered securities. Id.
Although Rayner does not dispute that the securities at issue were covered
securities, Rayner argues that it was E*TRADE that was induced to purchase or
sell securities, and “[i]f the only party who decides to buy or sell a covered security
as a result of a lie is the liar, that is not a ‘connection’ that matters.” Pl.‐Appellant
Reply Br. 13 (quoting Troice, 571 U.S. at 388); see also Troice, 571 U.S. at 388 (“[T]he
‘someone’ making th[e] decision to purchase or sell must be a party other than the
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fraudster.”). As already discussed above, Rayner’s claim amounts to an
allegation that E*TRADE’s routing practice fraudulently induced the plaintiffs (not
E*TRADE, the defendant) to purchase and sell securities at less favorable prices
and lower volumes than anticipated: E*TRADE’s clients “‘tried to take . . . an
ownership position” in covered securities at the optimal price and quantity.
Herald II, 753 F.3d at 113 (quoting Troice, 571 U.S. at 389) (emphasis in original).
“That [E*TRADE] fraudulently failed to follow through on its promise to place the
investments in covered securities” based on best execution standards “does not in
any respect remove this case from the ambit of SLUSA as defined in Troice.” Id.;
see also Zola, 889 F.3d at 926 (“[T]he broker’s ‘failure to provide best execution was
material to every trade in covered securities that [the] customer [] chose to have
[the broker] execute.’” (quoting Lewis, 879 F.3d at 853)); Fleming, 878 F.3d at 1155
(“[T]he false promise of best execution . . . caused losses directly resulting from
what clients believed to be legitimate securities transactions. The net price
obtained when purchasing or selling a security is plainly material to a buyer or
seller, and the alleged breach here coincided with securities transactions.”
(internal quotation marks and alterations omitted)). Cf. Newton v. Merrill, Lynch,
Pierce, Fenner & Smith, Inc., 135 F.3d 266, 269 (3d Cir. 1998) (“[A] broker‐dealer, by
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accepting an order without price instructions, impliedly represents that the order
will be executed in a manner consistent with the duty of best execution and that a
broker‐dealer who accepts such an order while intending to breach that duty
makes a misrepresentation that is material to the purchase or sale.”).
CONCLUSION
We have considered all of Rayner’s remaining arguments and find them to
be meritless. For the foregoing reasons, we AFFIRM the judgment of the district
court.
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