*In order to be “in connection with” the purchase or sale of a covered security under SLUSA, a misrepresentation must be material to the transaction. **Single-digit overpayments of flat per-transaction commissions in an account valued in excess of one-half million dollars are objectively immaterial to the transaction.
Taksir vs. The Vanguard Group, No. 17-3585 (3rd Cir., 9/4/18).
Plaintiff in this breach of contract putative class action alleged that defendant fund had charged a $7 per trade commission instead of the $2 commission advertised in its website for investors who maintained certain account balances. The brokerage affiliate of defendant fund complex moved to dismiss on the ground that plaintiff’s allegations of commission misstatements transformed plaintiff’s breach of contract claim under state law into one for fraud in connection with the purchase or sale of securities, subject to SLUSA’s preclusion of fraud-based state law claims. The district court declined to dismiss the claims, but certified an interlocutory appeal.
Two Supreme Court Precedents
In a precedential opinion, the Appellate Court sides with the district court and affirms the non-dismissal, finding that the alleged misrepresentations are not material to the transactions at issue and that a misstatement is not “in connection with” a securities transaction unless it is material to it. In so holding, the Court finds no difference between the U.S. Supreme Court’s statement in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit (SOLA 2006-13) that “it is enough that the fraud alleged ‘coincide’ with a securities transaction,” and the same Court’s decision in Chadbourne & Park LLP v. Troice (SOLA 2014-09), that in order to be “in connection with” the purchase or sale of a security, the misrepresentation must be material to the transaction at issue. Defendant argued that Troice should not be followed because it was narrower than, and distinguishable from, what defendant claimed was the broader formulation in Dabit. However, the Court holds that the Troice reference to materiality did not modify Dabit on the meaning of “in connection with” under SLUSA. Rather, it clarified that, even for SLUSA, “the ‘in connection with’ standard requires ‘a connection that matters.’”
An Immaterial Misstatement
The Court distinguishes other best execution and mutual fund “side-payment” cases where, it explains, the connection between the misconduct and the transaction was much closer than “the connection between the overcharges and the trades at issue here.” Turning to those charges, the Court agrees with the Seventh and the Ninth Circuits that inflated commissions do not trigger the SLUSA bar. As the Court observes, SLUSA materiality is an objective test, and single-digit differences in trading commissions are objectively immaterial to a $500,000 account holder.
Finally, the Court concludes, the commission discrepancy at issue here was not the result of any misrepresentation of what defendant intended to charge, but its failure in a handful of transactions to abide by its own commission agreement—a case of contract breach perhaps, but not a fraud to which SLUSA might apply.
(D. Franceski: Though Defendant, The Vanguard Group is a client of this editor’s law firm, Stradley Ronon, the firm had no involvement in the matter which is the subject of this report.)
(SOLA Ref. No. 2018-38-03)
NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis.
Like what you see here?
Twice a week we present blog posts consisting of one write-up from each of our two flagship weekly online Alert services. Consider a subscription to these publications to receive the full array of coverage right on your desktop every week. Give it a try and sign up for a free trial to the Securities Arbitration Alert and the Securities Litigation Alert.