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TY Rayner v. E*TRADE Financial Corp.

United States District Court, S.D. New York

April 1, 2017



          John G. Koeltl United States District Judge

         The defendants, E*TRADE Financial Corporation (“E*TRADE Financial”) and E*TRADE Securities LLC (“E*TRADE Securities”) (collectively, “E*TRADE”), provide brokerage services to clients, including by routing client orders to third-party trading venues to effectuate the purchase and sale of securities. The plaintiff, Ty Rayner, on behalf of a purported class claims that E*TRADE violates its fiduciary duties to its clients by routing orders to venues based on which venue makes the largest payments to E*TRADE in exchange for the orders, whereas E*TRADE should be selecting venues based only on best execution considerations. The plaintiff has brought claims against E*TRADE for breach of fiduciary duty, unjust enrichment, and declaratory judgment. E*TRADE has moved to dismiss the claims pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure because they are precluded by the Securities Litigation Uniform Standards Act (the “SLUSA”).

         The plaintiff originally brought this action in the United States District Court for the Northern District of California. The action was subsequently transferred to this Court pursuant to 28 U.S.C. § 1404 on the joint stipulation of the parties.[1] See Dkt. 26. This Court has jurisdiction pursuant to 28 U.S.C. § 1332(d)(2).

         The plaintiffs in a related action have brought claims pursuant to sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against E*TRADE and several individual defendants. See Schwab v. E Trade Financial Corporation, No. 16-cv-05891 (JGK) (S.D.N.Y.). Those claims are not presently before the Court.

         For the following reasons, E*TRADE's motion to dismiss is granted.[2]


         In deciding a motion to dismiss pursuant to Rule 12(b)(6), the allegations in the complaint are accepted as true, and all reasonable inferences must be drawn in the plaintiff's favor. McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir. 2007). The Court's function on a motion to dismiss is “not to weigh the evidence that might be presented at a trial but merely to determine whether the complaint itself is legally sufficient.” Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985). The Court should not dismiss the complaint if the plaintiff has stated “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

         While the Court should construe the factual allegations in the light most favorable to the plaintiff, “the tenet that a court must accept as true all of the allegations contained in the complaint is inapplicable to legal conclusions.” Id.; see also Springer v. U.S. Bank Nat'l Ass'n, No. 15-cv-1107 (JGK), 2015 WL 9462083, at *1 (S.D.N.Y. Dec. 23, 2015). When presented with a motion to dismiss pursuant to Rule 12(b)(6), the Court may consider documents that are referenced in the complaint, documents that the plaintiff relied on in bringing suit and that are either in the plaintiff's possession or that the plaintiff knew of when bringing suit, or matters of which judicial notice may be taken. Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002).


         The allegations in the Complaint are accepted as true for the purposes of this motion to dismiss.

         E*TRADE Financial Corporation is a Delaware corporation, with its principal place of business in New York, that provides brokerage and related services to individual retail investors. Compl. ¶ 7. E*TRADE Securities is a Delaware limited liability company that is an indirect, wholly owned subsidiary of E*TRADE Financial. Compl. ¶ 8. E*TRADE Securities is a broker-dealer registered with the Securities and Exchange Commission, and is the primary provider of brokerage products and services to E*TRADE Financial's customers. Compl. ¶ 8.

         Brokers, such as E*TRADE, can route orders to third-party venues, such as the New Yok Stock Exchange, hedge funds, or banks. Compl. ¶ 9. A “non-directed, standing limit order” is a standard type of order that a client can place with E*TRADE. Compl. ¶ 1 & n.1. “Non-directed” means that E*TRADE (as opposed to the client) chooses the trading venue for the order. Compl. ¶ 1 n.1. “Limit” is an instruction to buy or sell at, or better than, a specified price. Compl. ¶ 1 n.1. “Standing” means that the order will remain with the venue until it is canceled or executed, or until it expires. Compl. ¶ 1 n.1.

         The Complaint alleges that, under the “maker-taker” model, venues make payments to brokerage firms, such as E*TRADE, in exchange for order flow. Compl. ¶ 10. The Complaint pejoratively characterizes these payments or rebates as “kickbacks.” See, e.g., Compl. ¶¶ 1, 10. Under the maker-taker model, venues pay brokerage firms for sending (in other words, “making”) orders to the venues, while venues charge brokers an access or “take” fee for “taking” the orders. Compl. ¶ 10. The Complaint alleges that venues compete for order flow by maximizing payment amounts to brokers. Compl. ¶ 10.

         The Complaint alleges that E*TRADE owes its clients a “duty of best execution, ” meaning that E*TRADE should endeavor to obtain the best price possible for its clients when making venue routing selections. Compl. ¶¶ 15-17, 19. The Complaint alleges that relevant factors for E*TRADE's choice of venue must include the “likelihood of execution, speed of execution, and price improvement opportunity.” Compl. ¶ 18. The Complaint alleges that the duty of best execution is “rooted in common law agency principles of undivided loyalty and reasonable care” that “predate[] federal securities laws.” Compl. ¶ 16. ...

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