The firm won a significant victory for E*TRADE Securities and E*TRADE Financial when Judge Koeltl of the SDNY dismissed Section 10(b) and Section 20 putative class action claims against E*TRADE in Schwab v. E*TRADE Financial Corporation, 1:16-cv-5891 (SDNY). The decision is significant because it represents a rare instance of dismissal of a Section 10(b) claim for lack of reliance. The Court held that the Affiliated Ute presumption of reliance did not apply because plaintiff’s second amended complaint alleged primarily affirmative misrepresentations and did not allege any omission with particularity. In the absence of a presumption of reliance, plaintiff must plead actual reliance, which he failed to do—the Court held that plaintiff’s allegations of detrimental reliance were “entirely conclusory,” and “fail to show with any sort of particularity . . . that the plaintiff was aware . . . of any of the challenged misstatements when he traded with E*TRADE.” 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. The Court also dismissed the complaint for failure to adequately plead scienter, holding that “[t]he pursuit of PFOF is the type of generic profit motive that is insufficient to establish scienter.” The Court also confirmed that, in the Second Circuit, the “core operations” doctrine does not on its own suffice to plead scienter (though it may supplement other allegations of scienter).
This case is among a slew of cases brought against various retail brokers challenging their receipt of payment for order flow and order-routing practices. It represents a significant victory for E*TRADE in defending against the baseless allegation that it does not comply with its duty of best execution in routing its customers’ orders to various market exchanges. TD Ameritrade unsuccessfully moved to dismiss a complaint brought against it in the United States District Court for the District of Nebraska bringing a Section 10(b) claim on the basis of similar allegations concerning TD Ameritrade’s order routing practices and receipt of payment for order flow. See Zola v. TD Ameritrade, Inc., 172 F. Supp. 3d 1055 (D. Neb. 2016).
This is the second victory Quinn Emanuel has obtained for E*TRADE in connection with its order routing practices: In April 2017, Judge Koeltl granted E*TRADE’s motion to dismiss a putative class action making similar allegations as to E*TRADE’s order routing practices, and bringing state law claims of breach of fiduciary duty and unjust enrichment. 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.