The firm won another significant victory for E*TRADE Securities and E*TRADE Financial when Judge Koeltl of the SDNY dismissed, with prejudice, a putative class action pursuing claims under Sections 10(b) and 20(a) of the Securities Exchange Act for allegedly favoring venues that provided the highest payment-for-order-flow (“PFOF”) in contrast to their representations that E*TRADE complied with best execution. Schwab v. E*TRADE Financial Corporation, 1:16-cv-5891 (SDNY). The decision is significant because it comes on the heels of other courts sustaining nearly identical claims brought by the same plaintiffs’ counsel against both Charles Schwab and TD Ameritrade. TD Ameritrade, Inc., 172 F. Supp. 3d 1055 (D. Neb. 2016); Crago v. Charles Schwab & Co., Inc., 16-cv-3938, 2017 WL 2540557 (N.D. Cal. June 12, 2017).
Unlike the courts in the Charles Schwab and TD Ameritrade cases, Judge Koeltl held that the plaintiffs had not adequately pled reliance or scienter. On reliance, the Court held that plaintiff’s third amended complaint primarily alleged affirmative misrepresentations and therefore was not entitled to the Affiliated Ute presumption of reliance and Plaintiffs had made no attempt to plead actual “eyeball” reliance. The Court’s decision affirms that alleged omissions that are the mere “flip side” of alleged affirmative misrepresentations do not suffice to invoke the Affiliated Ute presumption of reliance. On scienter, the Court held that “[t]he pursuit of PFOF is the type of generic profit motive that is insufficient to establish scienter.”
This is the third victory Quinn Emanuel has won for E*TRADE in connection with its order routing practices: In July 2017, prior to the decision sustaining claims against Charles Schwab, Judge Koeltl granted E*TRADE’s motion to dismiss the plaintiff’s second amended complaint in this action. In April 2017, Judge Koeltl granted E*TRADE’s motion to dismiss a separate putative class action alleging breach of fiduciary duty and unjust enrichment for the same underlying alleged conduct. The Court was persuaded that that the complaint was precluded by the Securities Litigation Uniform Standards Act (“SLUSA”) and dismissed all claims on that basis.