United States District Court, S.D. New York
CRAIG L. SCHWAB, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, Plaintiff,
E*TRADE FINANCIAL CORPORATION ET AL, Defendants.
OPINION AND ORDER
G. Koeltl United States District Judge
lead plaintiff, Craig L. Schwab, brought this case on behalf
of a proposed class of clients of E*TRADE Securities LLC
("E*TRADE") who placed securities trade orders with
E*TRADE between July 12, 2011 and July 22, 2016 (the
"Class Period"}. In Count I, the plaintiff asserts
violations of Section 10(b) of the Securities Exchange Act of
1934, 15 U.S.C. § 78j(b) (the "Exchange Act"),
and Rule 10b-5 promulgated thereunder, 17 C.F.R. §
240.10b-5, against E*TRADE and E*TRADE Financial Corporation
("E*TRADE Financial"), E*TRADE's parent
corporation (collectively, the "corporate
defendants"). In Count II, the plaintiff asserts control
person liability under Section 20(a) of the Exchange Act, 15
U.S.C. § 78t (a), against Paul T. Idzik and Karl A.
Roessner (collectively, the "individual
defendants"). Idzik is a former director and Chief
Executive Officer of E*TRADE Financial, and Roessner is the
former General Counsel and a current director and Chief
Executive Officer of E*TRADE Financial.
Memorandum Order and Opinion dated April 3, 2017, this Court
dismissed common law claims against E*TRADE and E*TRADE
Financial that arose out of the same conduct at issue here
because those claims were precluded by the Securities
Litigation Uniform Standards Act (the "SLUSA"). See
Rayner v. E*TRADE Fin. Corp., 248 F.Supp.3d 497, 506
(S.D.N.Y. 2017), appeal docketed, No. 17-1487 (2d
Cir. May 8, 2017) ("E*TRADE I"). In an
Opinion dated July 10, 2017, this Court dismissed the Second
Amended Complaint (the "SAC"} in this action
without prejudice for failure to plead adequately the
reliance and scienter elements of the plaintiff's Section
10(b) and Rule 10b-5 claim, upon which the plaintiff s claim
for control person liability was premised. See Schwab v.
E*TRADE Fin. Corp., 258 F.Supp.3d 418 (S.D.N.Y. 2017)
("E*TRADE II"). Familiarity with those
decisions and the underlying facts of the case are presumed.
August 9, 2017, the plaintiff filed the Third Amended
Complaint (the "TAC"}, the plaintiffs fourth
pleading in this case. The defendants have moved to dismiss
the TAC for failure to state a claim pursuant to Rule
12(b)(6) of the Federal Rules of Civil Procedure.
following reasons, the motion is granted.
deciding a motion to dismiss pursuant to Rule 12(b)(6} of the
Federal Rules of Civil Procedure, 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). A complaint should not be
dismissed 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[s] [are]
liable for the misconduct alleged." Ashcroft v.
Igbal, 556 U.S. 662, 678 (2009). While factual
allegations should be construed in the light most favorable
to the plaintiff, "the tenet that a court must accept as
true all of the allegations contained in a complaint is
inapplicable to legal conclusions." Id.
under Section 10(b) of the Securities Exchange Act sounds in
fraud and must meet the pleading requirements of Rule 9(b) of
the Federal Rules of Civil Procedure and of the Private
Securities Litigation Reform Act ("PSLRA"), 15
U.S.C. § 78u-4(b). Rule 9(b) requires that the complaint
"(1) specify the statements that the plaintiff contends
were fraudulent, (2) identify the speaker, (3) state where
and when the statements were made, and (4) explain why the
statements were fraudulent." ATSI Commons, Inc. v.
Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir. 2007). The
PSLRA similarly requires that the complaint "specify
each statement alleged to have been misleading [and] the
reason or reasons why the statement is misleading, " and
it adds the requirement that "if an allegation regarding
the statement or omission is made on information and belief,
the complaint shall state with particularity all facts on
which that belief is formed." 15 U.S.C. §
78u-4(b)(1); ATSI, 493 F.3d at 99.
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. See Chambers v. Time
Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002). The
Court can take judicial notice of public disclosure documents
that must be filed with the SEC and documents that both
"bear on the adequacy" of SEC disclosures and are
"public disclosure documents required by law."
Kramer v. Time Warner, Inc., 937 F.2d 767, 773-74
(2d Cir. 1991); see also In re Eletrobras Sec.
Litig., No. 15-cv-5754 (JGK), 2017 WL 1157138, at *l-2
(S.D.N.Y. Mar. 27, 2017) .
following facts are undisputed or accepted as true for
purposes of the defendants' motion to dismiss. Facts are
repeated from E*TRADE II only as necessary.
Financial is a Delaware corporation, with its principal place
of business in New York City, that provides brokerage and
related services primarily to individual retail investors.
TAC ¶ 18. E*TRADE is a Delaware limited liability
company that is a wholly-owned subsidiary of E*TRADE
Financial.Id. ¶ 19. E*TRADE is a
broker-dealer registered with the United States Securities
and Exchange Commission (the "SEC"), and is the
primary provider of brokerage products and services to
E*TRADE Financial's customers. Id.
was the CEO and a director of E*TRADE Financial from January
22, 2013 until his departure on September 12, 2016.
Id. ¶ 20.
May 2009 to September 12, 2016, Roessner served as the
Executive Vice President and General Counsel of E*TRADE.
Id. ¶ 21. On September 12, 2016, Roessner
became the CEO and a director of E*TRADE Financial, and the
President of E*TRADE Bank, a subsidiary of E*TRADE Financial.
Id. ¶¶ 19, 21.
such as E*TRADE, can route orders for execution to
third-party venues, such as exchanges and market makers.
Id. ¶¶ 22, 24. A "non-directed
order" is a standard type of order that a client can
place with E*TRADE where E*TRADE (as opposed to the client}
chooses the trading venue for the order. Id. ¶
24. The TAC alleges that "over 95 percent of orders
placed with E*TRADE are non-directed." Id.
generates revenue from both the commissions that its
customers pay in exchange for routing orders and from the
payments for order flow ("Payments for Order Flow"
or "PFOF") that it receives from venues under the
"maker-taker" model. Id. ¶¶ 7,
34. Under the maker-taker model, venues pay brokerage firms
for "making" a market or adding liguidity for
certain types of orders, while venues charge brokers an
access or "take" fee for matching a marketable
order with an existing bid or offer. Id. ¶ 30.
maker-taker model, including the receipt of PFOF, is heavily
regulated by the federal securities regime. See,
e.g., Regulation NMS, Exchange Act Release No. 34-51808,
2005 WL 1364545 (June 9, 2005); see also E*TRADE I,
248 F.Supp.3d at 501. There is no allegation that the receipt
of PFOF is inherently wrongful; indeed, the SEC permits
broker-dealers to receive PFOF subject to certain disclosure
requirements. 17 C.F.R. § 240.10b-10(a)(2)(i)(C);
see also Exchange Act Rule 606, 17 C.F.R. §
242.606 (requiring the disclosure of quarterly reports
related to the receipt of PFOF).
has a duty of best execution, which, among other things,
requires it to "use reasonable diligence to ascertain
the best market for the subject security and buy or sell in
such market so that the resultant price to the customer is as
favorable as possible under prevailing market
conditions." Financial Industry Regulatory Authority
("FINRA") Rule 5310(a)(1); see also TAC
¶¶ 39-48. In its Customer Agreement, E*TRADE
purports to take a number of factors into consideration in
determining where to rout customers' orders, including:
the speed of execution, price improvement opportunities
(executions at prices superior to the then prevailing inside
market), automatic execution guarantees, the availability of
efficient and reliable order handling systems, the level of
service provided, the cost of executing orders, whether it
will receive cash or ...