Crago v. Charles Schwab & Co., Inc. et al, No. 3:2016cv03938 - Document 192 (N.D. Cal. 2021)
Court Description: ORDER DENYING MOTION FOR CLASS CERTIFICATION AND DENYING AS MOOT MOTION TO EXCLUDE TESTIMONY OF PLAINTIFFS' EXPERT HAIM BODEK. Signed by Chief Judge Richard Seeborg on 10/27/2021. (rslc3, COURT STAFF) (Filed on 10/27/2021)
Download PDF
<![CDATA[
1 2 3 4 5 6 7 UNITED STATES DISTRICT COURT 8 NORTHERN DISTRICT OF CALIFORNIA 9 10 ROBERT CRAGO, et al., Case No. 16-cv-03938-RS Plaintiffs, 11 United States District Court Northern District of California v. ORDER DENYING MOTION FOR CLASS CERTIFICATION 12 13 CHARLES SCHWAB & CO., INC., et al., Defendants. 14 15 16 Lead Plaintiffs Robert Wolfson and Frank Pino (“Lead Plaintiffs”), together with plaintiff 17 K. Scott Posson (collectively, “Plaintiffs”), bring this putative class action to redress alleged 18 violations of securities law committed by defendants Charles Schwab & Co and Schwab Corp. 19 (‘Schwab”). Plaintiffs allege that between July 13, 2011 and December 31, 2014 (the “Class 20 Period”), Schwab routed customer orders to UBS Securities LLC (“UBS”) in a manner 21 inconsistent with Schwab’s duty of best execution. Plaintiffs aver that Schwab made material 22 misrepresentations by stating that it adhered to the duty of best execution and omitted key 23 information about an agreement to route most orders to UBS for execution, without verifying that 24 UBS was providing best execution. 25 Plaintiffs seek certification under Federal Rule of Civil Procedure 23(b)(1) and (b)(3). 26 Class certification is inappropriate because there is no presumption of reliance in this case, and 27 requiring individualized proof of reliance as to each plaintiff defeats the commonality requirement 28 1 of Rule 23(a). Further, the lack of a presumption of reliance in this securities class action 2 precludes establishing predominance as required by Rule 23(b)(3). I. BACKGROUND1 3 4 A. Schwab, UBS, and Equities Order Routing 5 Broker-dealers, such as Schwab, buy and sell securities such as stocks and bonds for their 6 clients. After receiving an order from a client, the broker-dealer routes the order to a venue for 7 execution. Although sometimes a client specifies the venue an order should be routed to, most 8 retail orders are “non-directed,” including the vast majority of retail orders placed with Schwab. 9 Non-directed orders allow the broker to choose a venue for execution. Securities laws and regulations place some limitations on how broker-dealers may execute United States District Court Northern District of California 10 11 orders, such as the duty of best execution. Broker-dealers, including Schwab, are required under 12 Financial Industry Regulatory Authority (“FINRA”) Rule 5310 to “use reasonable diligence to 13 ascertain the best market . . . so that the resultant price to the customer is as favorable as possible 14 under prevailing market conditions.” See also SEC Rel. No. 34-37619A, 61 FR 48290 (Sept. 12, 15 1996) (“[The] duty of best execution requires a broker-dealer to seek the most favorable terms 16 reasonably available under the circumstances for a customer’s transaction.”). When a broker- 17 dealer considers whether its existing routing scheme provides the most beneficial terms for 18 customer orders, the broker-dealer should consider, among other factors, price improvement 19 opportunities,2 differences in price disimprovement,3 the speed of execution, transaction costs, and 20 customer needs and expectations. See FINRA Rule 5310.09(b). 21 22 23 24 25 26 27 1 The facts underlying this controversy are familiar to the parties, and are summarized here for purposes of providing a brief synopsis. Additional detail is included as necessary in the discussion below. See generally infra Part III. Price improvement refers to “the difference between the execution price and the best quotes prevailing at the time the order is received by the market[.]” FINRA Rule 5310.09(b)(1). 2 Price disimprovement refers to “situations in which a customer receives a worse price at execution than the best quotes prevailing at the time the order is received by the market[.]” FINRA Rule 5310.09(b)(2). 3 28 ORDER DENYING MOTION FOR CLASS CERTIFICATION CASE NO. 16-cv-03938-RS 2 1 2 in which Schwab agreed to route many orders to UBS. Schwab and UBS entered into the 3 agreement after UBS acquired the capital markets divisions of Schwab Corp. UBS paid Schwab 4 approximately $100 million each year the agreement was in effect to receive the orders, and 5 Schwab routed more than 95% of its retail trade orders to UBS, even though other vendors were 6 also available. 7 B. Plaintiff’s Allegations 8 Plaintiffs aver that although Schwab stated on its website it adhered to the duty of best 9 United States District Court Northern District of California In 2004, Schwab and UBS entered into an Equities Order Handling Agreement (“EOHA”), execution, Schwab violated that duty in routing most orders to UBS pursuant to the EOHA. 10 Plaintiffs explain that routing to UBS pursuant to the EOHA violated the duty of best execution 11 because of UBS’s inferior performance as compared to other possible vendors and Schwab’s 12 failure to monitor the execution quality of the routed orders adequately, contrary to claims on its 13 website. Plaintiffs aver that Schwab failed to disclose the EOHA to its retail clients, and clients 14 such as the Plaintiffs relied on Schwab’s false statements when choosing to place orders through 15 Schwab. The result of Schwab’s violation of the duty of best execution, Plaintiffs contend, is that 16 customers in the proposed class received higher prices for purchase orders and lower prices for 17 sell orders than if their broker-dealer had fulfilled the duty of best execution, among other harms. 18 C. Proposed Class and Putative Class Claims 19 Plaintiff moves to certify the following class: 20 All clients of Charles Schwab & Co., Inc. or The Charles Schwab Corporation (together, “Schwab”), between July 13, 2011 and December 31, 2014 (the “Class Period”), who placed one or more non-directed equity orders during the Class Period that were routed to UBS by Schwab pursuant to the Equities Order Handling Agreement (“EOHA”) and that received price disimprovement. Excluded from the Class are the officers, directors, and employees of Schwab. 21 22 23 24 Plaintiffs assert claims on behalf of the putative class under Section 10(b) of the Securities 25 Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78j(b), and U.S. Securities and 26 Exchange Commission (“SEC”) Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. 27 “To recover damages in a private securities-fraud action under [§ 10(b) and Rule 10b-5], 28 ORDER DENYING MOTION FOR CLASS CERTIFICATION CASE NO. 16-cv-03938-RS 3 1 a plaintiff must prove ‘(1) a material misrepresentation or omission by the defendant; (2) scienter; 2 (3) a connection between the misrepresentation or omission and the purchase or sale of a security; 3 (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.’” 4 Amgen Inc. v. Conn. Ret. Plans & Tr. Funds, 568 U.S. 455, 460–61 (2013) (quoting Matrixx 5 Initiatives, Inc v. Siracusano, 563 U.S. 27, 37–38 (2011)). II. LEGAL STANDARD 6 Class actions are governed by Rule 23 of the Federal Rules of Civil Procedure, which United States District Court Northern District of California 7 8 represents more than a mere pleading standard. To obtain class certification, plaintiffs bear the 9 burden of showing they have met each of the four requirements of Rule 23(a) and at least one 10 subsection of Rule 23(b). Zinser v. Accufix Research Inst., Inc., 253 F.3d 1180, 1186, amended 11 by 273 F.3d 1266 (9th Cir. 2001). “A party seeking class certification must affirmatively 12 demonstrate . . . compliance with the Rule[.]” Wal–Mart Stores, Inc. v. Dukes, 564 U.S. 338, 350 13 (2011). 14 Rule 23(a) provides that a court may certify a class only if: “(1) the class is so numerous 15 that joinder of all members is impracticable; (2) there are questions of law or fact common to the 16 class; (3) the claims or defenses of the representative parties are typical of the claims or defenses 17 of the class; and (4) the representative parties will fairly and adequately protect the interests of the 18 class.” These requirements are commonly referred to as numerosity, commonality, typicality, and 19 adequacy of representation. Mazza v. Am. Honda Motor Co., Inc., 666 F.3d 581, 588 (9th Cir. 20 2012). If all four Rule 23(a) prerequisites are satisfied, a court must also find that plaintiffs 21 “satisfy through evidentiary proof” at least one of the three subsections of Rule 23(b). Comcast 22 Corp. v. Behrend, 569 U.S. 27, 33 (2013). III. DISCUSSION 23 24 25 A. Presumption of Reliance As a plaintiff must demonstrate reliance upon the omission or misrepresentation in order to 26 recover damages under Rule 10b-5, a threshold issue is whether Plaintiffs may invoke a 27 presumption of reliance under Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 28 ORDER DENYING MOTION FOR CLASS CERTIFICATION CASE NO. 16-cv-03938-RS 4 1 (1972). In Affiliated Ute, the Supreme Court held that in a case “involving primarily a failure to 2 disclose, positive proof of reliance is not a prerequisite to recovery.” Id. at 153. Instead, “[a]ll that 3 is necessary is that the facts withheld be material in the sense that a reasonable investor might 4 have considered them important in the making of this decision.” Id. at 153–54. United States District Court Northern District of California 5 The Ninth Circuit recently addressed the relationship between omissions and 6 misrepresentations and when a plaintiff can invoke the Affiliated Ute presumption in a “mixed” 7 case involving both omissions and misrepresentations. See In re Volkswagen “Clean Diesel” 8 Mktg., Sales Practices, & Prod. Liab. Litig., 2 F.4th 1199 (9th Cir. 2021). In Volkswagen, the 9 Ninth Circuit declined to apply the Affiliated Ute presumption, despite the plaintiff’s allegation of 10 a serious omission: that “Volkswagen failed to disclose—for years—it was secretly installing 11 defeat devices in its ‘clean diesel’ line of cars to mask unlawfully high emissions from regulators 12 and cheat on emissions tests.” Id. at 1206. 13 The Ninth Circuit in Volkswagen explained that the Supreme Court’s justification in 14 establishing a presumption in Affiliated Ute was that “reliance is impossible or impractical to 15 prove when no positive statements were made.” Id. In Volkswagen, the Plaintiff pled over nine 16 pages of material misrepresentations concerning Volkswagen’s environmental compliance and 17 financial liabilities in addition to the omission concerning defeat devices, and pled that Plaintiff 18 relied on those affirmative misrepresentations. Id. at 1206, 1208. The court also noted the 19 relationship between the alleged misrepresentations and alleged omissions, explaining that the 20 “omission regarding Volkswagen’s use of defeat devices is simply the inverse of the affirmative 21 misrepresentations” concerning environmental compliance and financial obligations. Id. at 1208. 22 As there were affirmative misrepresentations allowing the plaintiff to “prove reliance through 23 ordinary means by demonstrating a connection between the alleged misstatements and its injury,” 24 the Affiliated Ute presumption did not apply. Id. at 1209. 25 Similar to Volkswagen, Plaintiffs in this action allege both affirmative misrepresentations 26 and a key omission. In addition to failing to disclose the EOHA, Plaintiffs allege in their Second 27 Amended Class Action Complaint (“SAC”) that during the Class Period, Schwab “stated that . . . 28 ORDER DENYING MOTION FOR CLASS CERTIFICATION CASE NO. 16-cv-03938-RS 5 1 it complied with its duty of best execution,” and that Schwab claimed that it sought to exceed the 2 best execution criteria as established by the SEC. SAC, Dkt. 81 ¶ 4, 40. Plaintiffs also allege that 3 the 2013 and 2014 Account Agreements, which clients had to agree to in order to use Schwab’s 4 services, specifically provided that Schwab would route orders only after considering quality 5 metrics. SAC, Dkt. 81 ¶ 41, 45. United States District Court Northern District of California 6 Plaintiffs argue that Volkswagen was a fact-specific opinion, and that the facts in this case 7 bear no resemblance to those there. This present case is certainly not identical to Volkswagen, in 8 which the plaintiff alleged over nine pages of affirmative misrepresentations. 2 F.4th at 1206. The 9 affirmative misrepresentations alleged in this case are not so extensive. The Volkswagen decision, 10 however, does not appear to focus solely on the quantity of misrepresentations. Instead, 11 Volkswagen emphasizes the relationship between the omissions and the misrepresentations. If the 12 omissions are effectively the inverse of the misrepresentations—in that they render the statement 13 alleged to be a misrepresentation untrue—a case is not primarily an omissions case. Id. at 1208. 14 Plaintiffs’ own allegations in the SAC support this understanding of the relationship 15 between the alleged misrepresentations and alleged omission. The SAC alleges that “statements on 16 Schwab’s website and statements made to the government and the media . . . were designed to 17 convince” both the public and Schwab’s clients that “Schwab was routing its clients’ orders upon 18 consideration of proper execution quality metrics when, in fact, Schwab omitted material facts that 19 indicated that it was in fact prioritizing the [EOHA].” SAC, Dkt. 81 ¶ 156. What matters here is 20 not just that Schwab omitted information about the EOHA, but that Schwab affirmatively stated it 21 was providing best execution. 22 Further, like in Volkswagen in which the plaintiff “explicitly ple[d] reliance” on the 23 affirmative misrepresentations, 2 F.4th at 1208, Plaintiffs also pled that they relied on Schwab’s 24 misrepresentations. In the SAC, Plaintiffs wrote that they “placed orders through Schwab with an 25 expectation of best execution throughout the Class Period” because of “the dissemination of the 26 [Schwab’s] public statements and documents” and “in reliance on Defendants’ materially 27 misleading statements and omissions[.]” SAC, Dkt. 81 ¶ 158. 28 ORDER DENYING MOTION FOR CLASS CERTIFICATION CASE NO. 16-cv-03938-RS 6 1 Additionally, the existence and nature of the EOHA was not completely omitted from the 2 Account Agreements. As Plaintiffs noted in the SAC, the Account Agreements for 2011 and 2012 3 referred to the EOHA but stated Schwab did not receive consideration for its agreement with UBS: 4 Part of the consideration Schwab received for the sale of its capital markets business to UBS in 2004 related to the execution services agreements with UBS and Schwab’s commitments to route most types of equity and listed options orders through UBS for eight years. However, Schwab does not earn rebates or other consideration from UBS or other firms or markets for equity and options orders routed through UBS or routed by Schwab directly. 5 6 7 SAC, Dkt. 81 ¶ 69. The agreement was again referenced in the 2013 and 2014 Account 8 9 10 United States District Court Northern District of California 11 Agreements, which stated that Schwab “may” receive compensation for routing orders: 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. 12 SAC, Dkt. 81 ¶ 70. Thus, the references to the existence of an agreement, along with 13 mischaracterizations of the nature of the agreement, also support that this case is not one primarily 14 involving omissions, as understood following Volkswagen. 15 As in Volkswagen, “Plaintiff[s] allege[] an omission, and that omission looms large over 16 Plaintiff[s’] claims.” 2 F.4th at 1206. The omission, however, is relevant to proving that 17 affirmative statements concerning the duty of best execution were inaccurate. The existence of 18 these affirmative statements is key, because they mean “Plaintiff[s] can prove reliance through 19 ordinary means by demonstrating a connection between the alleged misstatements and [their] 20 injury.” Id. at 1209. As the Ninth Circuit explained in Volkswagen, the ability to prove reliance on 21 affirmative misrepresentations removes Affiliated Ute’s concern about the “difficult or impossible 22 evidentiary burden of proving a ‘speculative possibility in an area where motivations are complex 23 and difficult to determine.’” Id. (quoting Blackie v. Barrack, 524 F.2d 891, 906 (9th Cir. 1981)). 24 Thus, in accordance with Volkswagen, this is not a case primarily alleging omissions that should 25 be afforded a presumption of reliance under Affiliated Ute. 26 27 28 ORDER DENYING MOTION FOR CLASS CERTIFICATION CASE NO. 16-cv-03938-RS 7 1 2 3 1. Rule 23(a) Schwab does not contest the adequacy and numerosity requirements, but contests both the 4 commonality and typicality requirements. As explained below, as Plaintiffs cannot demonstrate 5 commonality, typicality need not be reached. 6 i. 7 United States District Court Northern District of California B. Class Certification Commonality Demonstrating commonality requires a common contention that “is capable of classwide 8 resolution—which means that determination of its truth or falsity will resolve an issue that is 9 central to the validity of each one of the claims in one stroke.” Wal-Mart, 564 U.S. at 350. In 10 Wal-Mart, the Supreme Court held that commonality was not satisfied because “the crux of the 11 inquiry [was] the reason for a particular employment decision,” and it was “impossible to say that 12 examination of all the class members’ claims for relief will produce a common answer” to the 13 question of why each particular class member was disfavored. Id. at 352 (internal quotation marks 14 and citation omitted). 15 Here, the crux of the inquiry for the reliance element is whether each investor relied on 16 Schwab’s alleged misrepresentations and omissions when conducting each particular trade. 17 Although this inquiry would require asking each investor a common question, i.e., whether they 18 had read the alleged misrepresentation and relied on it when choosing to trade with Schwab, there 19 is not a common answer that “resolve[s] [the] issue that is central to the validity of each one of the 20 claims in one stroke.” Id. at 350. Instead, each plaintiff would need to provide individualized 21 evidence of their reliance. 22 The diverse motivations Plaintiffs held for using Schwab showcase the difficulty of 23 demonstrating commonality as to reliance. In addition to their stated reliance on Schwab’s 24 affirmations that it provided best execution, Plaintiffs gave other reasons for using Schwab, 25 including the quality of its platform, lower commissions as compared to other brokers, and 26 recommendations from family. Members of the putative class could have chosen to use Schwab 27 even if they had known Schwab was not providing best execution. Cf. Keirnan v. Homeland, Inc., 28 ORDER DENYING MOTION FOR CLASS CERTIFICATION CASE NO. 16-cv-03938-RS 8 1 611 F.2d 785, 789 (9th Cir. 1980) (explaining that a presumption of reliance may be rebutted by 2 showing that a “plaintiff did not attach significance to the misrepresented facts”). Indeed, for a 3 consumer trading a small number of stocks, knowledge of the relatively small individual losses 4 attributed to a failure to provide best execution may not have changed the consumer’s choice to 5 use Schwab, considering the variety of other factors at play when choosing a broker-dealer. 6 7 individualized proof of reliance as to each proposed class member “gives no cause to believe that 8 all [the Plaintiffs’] claims can productively be litigated at once.” Wal-Mart, 564 U.S. at 350. Thus, 9 the commonality requirement has not been satisfied. 10 11 United States District Court Northern District of California Given the millions of trades at issue in this proposed class, the need to analyze 2. Rule 23(b) Plaintiffs seek certification under Rules 23(b)(1)(A) and 23(b)(3). In addition to 12 certification not being appropriate for the reason described above, certification is also unavailable 13 under Rule 23(b)(3) due to a lack of predominance. 14 Certification under Rule 23(b)(3) is proper where the trial court “finds that the questions of 15 law or fact common to class members predominate over any questions affecting only individual 16 members, and that a class action is superior to other available methods for fairly and efficiently 17 adjudicating the controversy.” Fed. R. Civ. P. 23(b)(3). In Rule 10b-5 suits, “[r]equiring proof of 18 individualized reliance from each member of the proposed plaintiff class effectively would [] 19 prevent[] [plaintiffs] from proceeding with a class action, since individual issues then would [] 20 overwhelm[] the common ones.” Basic Inc. v. Levinson, 485 U.S. 224, 242, (1988); see also 21 Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258, 268 (2014). Since the reliance 22 presumption is not triggered in this case and Plaintiffs must present individualized proof of 23 reliance, they cannot demonstrate predominance. 24 IV. CONCLUSION 25 Consistent with the foregoing, the motion for class certification under Rules 23(a), 26 27 28 ORDER DENYING MOTION FOR CLASS CERTIFICATION CASE NO. 16-cv-03938-RS 9 1 23(b)(1)(A), and 23(b)(3) is denied.4 2 3 IT IS SO ORDERED. 4 5 Dated: October 27, 2021 ______________________________________ RICHARD SEEBORG Chief United States District Judge 6 7 8 9 10 United States District Court Northern District of California 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Schwab also filed a motion to exclude the testimony of Plaintiffs’ expert witness, Haim Bodek. See Dkt. 173. Bodek’s report concerned economic loss and an algorithm that he stated could analyze which orders sustained an economic loss during the Class Period. As the court denies class certification due to a lack of commonality and predominance as to the reliance requirement, this motion to exclude is denied as moot. Plaintiffs’ unopposed administrative motion for leave to exceed the page limit in their reply brief concerning class certification, see Dkt. 175, is granted. 4 28 ORDER DENYING MOTION FOR CLASS CERTIFICATION CASE NO. 16-cv-03938-RS 10
]]>
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You
should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google
Privacy Policy and
Terms of Service apply.
