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Rayner v. E*TRADE Financial Corp.

United States Court of Appeals, Second Circuit

July 31, 2018

Ty Rayner, on Behalf of Himself and All Others Similarly Situated, Plaintiff-Appellant,
v.
E*TRADE Financial Corporation, E*TRADE Securities LLC, Defendants-Appellees.

          Argued: December 7, 2017

         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, 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.

          Before: Cabranes, Livingston, Circuit Judges, and Goldberg, Judge. [*]

          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 (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.

         BACKGROUND[1]

         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 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 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.

         DISCUSSION

         I. ...


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