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On July 31, 2018, the Second Circuit affirmed dismissal of a class action complaint alleging breach of the duty of best execution claims against a brokerage house based on the court’s determination that the Securities Litigation Uniform Standards Act (“SLUSA”) precludes such claims.[1] Rayner v. E*Trade Fin. Corp., 2018 WL 3625378 (2d Cir. 2018) (Livingston, J.). The Second Circuit joined the Eighth and Ninth Circuits “in concluding that best execution claims alleging misrepresentations or omissions relating to: (1) a broker’s receipt of ‘kickbacks’ from trading venues; and (2) the execution of trades so as to take advantage of such arrangements, satisfy the third element of SLUSA, by alleging securities claims based on fraudulent conduct.”[2] The court further held that such “alleged fraudulent conduct” is “‘in connection with’ the purchase or sale of covered securities” within the meaning of SLUSA.

The Second Circuit explained that it “emphasize[s] substance over form” when determining whether “allegations fall within the ambit of SLUSA.” The court stated that “plaintiffs cannot avoid SLUSA merely by consciously omitting references to securities or to the federal securities law,” nor can they “escape SLUSA by artfully characterizing a claim as dependent on a theory other than falsity when falsity nonetheless is essential to the claim.” Here, plaintiffs alleged that the brokerage house falsely represented that it would “do everything possible” to achieve the “best execution” for clients’ trades, when in fact, the company allegedly “rout[ed] clients’ trades to the trading venues that paid the highest ‘kickbacks.’” The Second Circuit found the “substance” of plaintiffs’ complaint “plainly allege[d] fraudulent conduct.”

The Second Circuit further held that the alleged fraud “arose ‘in connection with’ the purchase or sale of covered securities.” The court explained that in order “[t]o satisfy this element, the fraud perpetrated . . . must be material to a decision by one or more individuals (other than the fraudster) to buy or sell a covered security.” The court found the company’s purported “fraudulent failure to provide best execution allegedly caused . . . clients to purchase and sell securities at unfavorable prices and at lower volumes than expected.”