United States District Court, N.D. California
GRANTING DEFENDANT'S MOTION TO DISMISS WITH LEAVE
RICHARD SEEBORG United States District Judge.
Charles Schwab & Co., Inc. ("Schwab") moves to
dismiss plaintiffs Robert Wolfson and Frank Pino's
putative class action complaint for securities fraud. Because
plaintiffs fail to make adequate pleadings of falsity,
scienter, economic loss, loss causation, or reliance, their
complaint is dismissed with leave to amend.
Schwab is a large retail broker-dealer that places stock
trade orders on behalf of clients like plaintiffs Wolfson and
Pino. When Schwab receives a trade order from a client, it
must route the order to a venue for execution. In so doing,
it operates under a duty of best execution, which
encompasses, among other things, a duty to use reasonable
diligence to secure in any trade the most favorable terms and
Schwab has made various representations that it is committed
to securing best execution for its clients. For instance, it
has indicated on its website its intention to provide
"exceptional execution" and "the best possible
execution, " and claims to "regularly monitor the
execution quality provided by different exchanges and
liquidity providers." Compl. ¶ 25. It also asserts
in the 2015 Schwab One Account Agreement clients were
required to sign:
Schwab considers a number of factors in evaluating execution
quality among market centers, including the execution price
and opportunities for price improvement . . . Price
improvement occurs when an order is executed at a price more
favorable than the displayed national best bid or offer.
Schwab regularly monitors the execution quality provided by
various market centers to ensure orders are routed to markets
and firms that have provided high-quality executions over
Compl. ¶ 28.
2004, UBS Securities LLC ("UBS") acquired
Schwab's capital markets division, and the two companies
entered into an Equities Order Handling Agreement whereby
Schwab agreed to route at least 95% of its non-directed stock
trade orders to UBS. In exchange, UBS would pay Schwab $100
million a year in payment for order flow ("PFOF").
The agreement, which ran until 2012, provided for penalties
if Schwab did not meet the 95% threshold. In 2011, Schwab
extended the agreement into 2014. Pursuant to the agreement,
from 2004 to 2014, Schwab directed at least 95% of its
clients' non-directed orders to UBS. For the first
quarter of 2012 through the third quarter of 2014, Schwab
routed between 93% and 99% of each quarter's non-directed
trade orders to UBS. In the first quarter of 2015, Schwab
routed 73% of non-directed trade orders to UBS, and from the
second quarter of 2015 to the first quarter of 2016, Schwab
routed roughly 50% of such orders to UBS. According to
plaintiffs, this overwhelming majority of non-directed orders
being routed to a single venue was anomalous among retail
brokers. In the 2015 Account Agreement, Schwab disclosed:
Schwab may receive remuneration, such as liquidity or order
flow rebates, from a market center to which orders are
routed. In addition, part of the consideration received by
The Charles Schwab Corporation for the sale of its capital
markets business to UBS in 2004 related to an order routing
agreement with UBS, which has been extended. Quarterly
information regarding the market centers to which we route
orders and the remuneration received is available on our
website at www.schwab.com or in written form upon request.
Information regarding the specific routing destination and
execution time of your orders for up to a six-month period is
also available upon request.
Id. ¶ 29.
in 2015, Schwab, Fidelity, and Scottrade began disclosing to
the Financial Information Forum ("FIF") information
including: "(1) average order size; (2) price
improvement percentage; (3) average savings per order; and
(4) average execution speed." Compl. ¶ 66. The
information disclosed pertained to S&P 500 stocks and
other exchange-listed stocks, and covered only market orders
- orders that execute immediately - as opposed to
nonmarketable limit orders, which execute only when a stock
price reaches a certain threshold. Based on these
disclosures, on July 14, 2015, website KOR Trading published
an analysis indicating Schwab's average price improvement
lagged substantially behind that of Fidelity, which
apparently stopped accepting PFOF in 2014 and routed its
orders to a more diverse array of venues than did Schwab.
point to numerous reasons price improvement would suffer from
Schwab's bulk order routing to UBS, including Schwab
clients' resulting exposure to "dark pools" and
high-frequency traders, and the ability of UBS to become an
"internalizer" and profit from a captive retail
order flow. In addition to the KOR Trading report, plaintiffs
rely on various articles and academic studies indicating PFOF
(of the sort Schwab allegedly engaged in) will result in lost
price improvement for clients. They also identify statements
by SEC officials raising the risk that PFOF creates a
conflict of interest and results in lost price improvement.
allege they have suffered lost price improvement as a result
of Schwab's bulk order routing to UBS, and accordingly
allege Schwab's statements about its best execution
priorities were false. They also allege Schwab fraudulently
promulgated the false statements with scienter - knowing they
were false or acting with reckless disregard to the truth.
Plaintiffs claim certain statements by Schwab Chairman
Charles R. Schwab and Schwab CEO Walter Bettinger raise a
strong inference of scienter. These statements include: a
2013 statement by Charles Schwab and Bettinger criticizing
high frequency trading, and subsequent remarks by Bettinger
appearing to walk back that position; a 2000 statement by
Schwab to the Senate Banking Committee about the conflicts of
interest PFOF creates; and a 2014 statement by Bettinger
denying Schwab directed trade orders on the basis of PFOF.
13, 2016, Robert Crago initiated this putative class action
by filing a class action complaint. After a contested motion,
Wolfson and Pino were appointed lead plaintiffs. The pair
claims to have placed thousands of non-directed stock orders
during the class period, and hundreds or thousands in each
relevant year. They filed an amended class action complaint
on January 20, 2017, advancing one claim for relief for
Schwab's alleged violation of Section 10(b) of the
Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5
promulgated thereunder by the SEC. The action is brought on
behalf of a purported class comprised of: "All clients
of Schwab between July 13, 2011 and July 13, 2016 who placed
orders that were routed to UBS by Schwab pursuant to the
Equities Order Handling Agreement." Compl. ¶ 121.
On March 10, Schwab filed this motion to dismiss
plaintiffs' amended complaint.
pleading that states a claim for relief must contain ... a
short and plain statement of the claim showing that the
pleader is entitled to relief. . . ." Fed.R.Civ.P.
8(a)(2). "[D]etailed factual allegations" are not
required, but a complaint must provide sufficient factual
allegations to "state a claim to relief that is
plausible on its face." Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009) (quoting Bell Ail. v. Twombly,
550 U.S. 544, 555, 570 (2007)) (internal quotation marks
omitted). "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." Id. Federal Rule
of Civil Procedure 9(b), meanwhile, requires that, "[i]n
alleging fraud or mistake, a party must state with
particularity the circumstances constituting fraud or
mistake." To satisfy this pleading standard, a plaintiff
must allege the "who, what, where, when, and how"
of the alleged misconduct. Cooper v. Pickett, 137
F.3d 616, 627 (9th Cir.1997) (citation and internal quotation
marks omitted). The Rule 9(b) pleading standard "applies
to all elements of a securities fraud action."
Oregon Pub. Employees Ret. Fund v. Apollo Grp. Inc.,
114 F.3d 598, 605 (9th Cir. 2014). In actions governed
by the Private Securities Litigation Reform Act
("PSLRA"), such as this one, these pleading
standards are subject to further refinement, as discussed in
more detail below.
Rule of Civil Procedure 12(b)(6) provides a mechanism to test
the legal sufficiency of the averments in a complaint.
Dismissal is appropriate when the complaint "fail[s] to
state a claim upon which relief can be granted."
Fed.R.Civ.P. 12(b)(6). A complaint in whole or in part is
subject to dismissal if it lacks a cognizable legal theory or
the complaint does not include sufficient facts to support a
plausible claim under a cognizable legal theory. Navarro
v. Block,250 F.3d 729, 732 (9th Cir. 2001). When
evaluating a complaint, the court must accept all its
material allegations as true and construe them in the light
most favorable to the non-moving party. Iqbal, 556
U.S. at 678. When a plaintiff has failed to state a claim
upon which relief can be granted, leave to amend ...