8th Circuit Upholds Dismissal of TD Ameritrade ‘Kickback’ Class Actions

(CN) –  The Eight Circuit affirmed the dismissal of three proposed class actions against brokerage firm TD Ameritrade, where investors claimed the company wrongly directed client orders to trading venues that paid “kickbacks.”

Two pairs of investors sued TD Ameritrade in proposed class actions in Nebraska state court, claiming the company made millions from sending trades to whichever trading venues paid them the most.

Lead plaintiff Jay Zola said the company did not consider a variety of factors in determining where it sent client orders.

“Rather, as one of its own executives admitted in testimony before the United States Senate, TD Ameritrade routes ‘virtually all’ of its orders based on a single factor: what’s best for TD Ameritrade,” the complaint said. “That is, the TD Ameritrade executive admitted (and the data confirms) that TD Ameritrade has been routing virtually all of its customers’ orders through whichever order internalizer or exchange is willing to pay TD Ameritrade the most money to receive its order flow. In turn, those order internalizers and exchanges expose TD Ameritrade’s customers to toxic trading.”

Several of the investors sued to recoup the rebates and payments the firm received.

All the lawsuits alleged “a scheme to maximize its receipt of rebates and payments at the expense of its clients by knowingly routing orders to trading venues where high-frequency traders could manipulate and exploit the slower execution of TD Ameritrade’s client orders,” according to the appellate court’s summary.

Once the suits were removed to federal court, U.S. District Court Judge Joseph Bataillon dismissed them after concluding that the investors’ claims were precluded by the Securities Litigation Uniform Standards Act.

Under that law, enacted in 1998, a district court is required to dismiss certain securities class actions that claim “misrepresentation or omission of a material fact.”

On appeal, the Eighth Circuit concluded that “the gravamen of their claims involves a misrepresentation or omission” and thus it was properly dismissed.

Though they avoided using the words, the claims were still “grounded in TD Ameritrade’s failure to disclose the fact that it was selling its order flow to the highest bidders,” U.S. Circuit Judge Roger Wollman wrote in the 10-page order.

U.S. Circuit Judges James Loken and Michael Melloy joined the decision.

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