Schwab Nixes Customers’ Best-Execution Claims

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By Phyllis Diamond

Charles Schwab & Co. Dec. 29 defeated would-be class claims it breached fiduciary duties to retail customers by routing their trades to UBS Securities LLC when faster and cheaper execution may have been available at another venue.

The customers’ complaints pleaded state-law violations that also could have alleged deceptive conduct within the meaning of 1934 Securities Exchange Act Section 10(b), the U.S. Court of Appeals for the Ninth Circuit said.

As such, the district court properly held that the Securities Litigation Uniform Standards Act deprived it of subject matter jurisdiction.

SLUSA, intended to force compliance with heightened federal securities-fraud pleading requirements, calls for federal preemption—removal followed by dismissal—of state-law class actions alleging “misrepresentations in connection with the purchase or sale of a covered security.”

According to Judge Andrew Hurwitz, in 2004, Schwab agreed to route 95 percent of its “non-directed trades”—trades for which clients haven’t selected another trading venue—to UBS for execution. The customers claimed Schwab breached various state-law duties by routing trades to UBS when it could have sent them to other venues, and that its arrangement with UBS “sometimes resulted in unfavorable executions, both in terms of price and speed.”

The district court dismissed the suit as preempted by SLUSA and the Ninth Circuit affirmed. It said that while not every breach of the duty of best execution violates Section 10(b), the claims in this case all allege deceptive conduct within the meaning of the antifraud proscription.

The substance of the allegations “is that Schwab, motivated by a conflict of interest, deceived Plaintiffs into believing it would deliver best execution of their trades, but knew that sending all trades to UBS would breach that duty. The complaints thus alleged a deceptive practice actionable under federal securities law,” requiring that they be dismissed under SLUSA, the appeals court said.

The case is Fleming v. Charles Schwab Corp. , 9th Cir., No. 16-1579, 12/29/17 .

To contact the reporter on this story: Phyllis Diamond in Washington at

To contact the editor responsible for this story: Seth Stern at

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