Roderick Ford sued TD Ameritrade for fraud in the execution of stock trades placed through the company’s online platform.  TD Ameritrade does not execute trades itself but routes them to high-speed trading venues.  Then it receives payments from the trading venues for those referrals.  The “duty of best execution” requires that brokers use reasonable efforts to maximize the economic benefit to the client in each transaction.

Mr. Ford based his claim on Rule 10b-5, which—among other things—prohibits “any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”  He sued on behalf of himself and all similarly situated TD Ameritrade customers, claiming that the brokerage cold have obtained better prices for their trades.  The District Court certified the case as a class action under Rule 23 of the Federal Rules of Civil Procedure.

The controlling question on appeal would be whether the lower court was correct in finding that questions liability and causation common to all class members substantially outweighed the damage measurement issues that would vary from member to member.  The district court explained its decision:  “The liability issues are capable of being proved by common, class-wide proof.  Common questions of defendant’s liability predominate over questions of the quantum of each class member’s economic loss.”

The Court of Appeals disagreed.  It held that the damage determination issues precluded class certification.  The court explained that best execution cases differ from typical Rule 10b-5 securities fraud cases, in which the fraud alleged by the plaintiff directly affects the price of securities:

The economic loss allegedly caused by TD Ameritrade’s order routing practices is “the difference between the price at which trades were executed and the better price allegedly available from an alternative trading source.  To justify class certification, Ford must how that he can establish this type of economic loss for a class of plaintiffs in a manner consistent with the predominance requirement of Rule 23.

Mr. Ford claimed that his expert witness had formulated “an advanced algorithm that can calculate injury and damages on a class-wide basis.”  The Eighth Circuit wasn’t buying:  “We conclude that despite advances in technology, individual evidence and inquiry is still required to determine economic loss for each class member.”

The Court may have chilled the inclination of plaintiffs’ lawyers to consider best execution class actions in the future, concluding in dictum:  “The duty regulates a broker’s process of routing orders for execution, but does not guarantee a specific outcome.”  And: “Compliance with the duty of best execution does not guarantee that the customer will get the best deal possible.  Nor does a violation of the duty of best execution necessarily cause a customer economic loss.”

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Photo of Michael Gross Michael Gross

Michael Gross is an appellate lawyer in St. Louis, Missouri. In addition to his work in appellate courts, Mr. Gross frequently consults with and performs legal research and writing for trial attorneys before they file suit, during the pendency of their cases in…

Michael Gross is an appellate lawyer in St. Louis, Missouri. In addition to his work in appellate courts, Mr. Gross frequently consults with and performs legal research and writing for trial attorneys before they file suit, during the pendency of their cases in trial courts, and through the mediation process.

Mr. Gross has represented clients in the United States Supreme Court, the Second, Sixth, Seventh, Eighth, Ninth, and Tenth Circuits, and the appellate courts of several states. He previously served as a member of the Eighth Circuit’s civil jury instructions committee.

After graduating from the University of Michigan Law School in 1971 Mr. Gross served as law clerk to the Hon. M. C. Matthes, Chief Judge of the United States Court of Appeals for the Eighth Circuit. He speaks frequently on topics related to appellate practice, legal writing, oral argument, and legal strategy and problem-solving at seminars sponsored by bar associations and other organizations.