SLUSA Does Not Bar Investors’ Claims That Broker Overcharged Them to Execute Securities Transactions

Taksir v. The Vanguard Group, 903 F.3d 95 (3d Cir. 2018).  As relevant to this appeal, the Securities Litigation Uniform Standards Act of 1998, 15 U.S.C. §78bb (“SLUSA”), states that “[n]o covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any party alleging — (A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security.”  Plaintiffs sued Vanguard for allegedly misrepresenting the fee that defendant charged plaintiffs to buy and sell securities, asserting a Pennsylvania statutory claim and a breach of contract claim.

Vanguard moved to dismiss the entire case, asserting an absolute bar under SLUSA, but the District Court granted that only as to the statutory claim, and that dismissal was not based on SLUSA.  The breach of contract claim survived.  After Vanugard’s motion for reconsideration was denied, the District Court certified the SLUSA issue for immediate review, and the Third Circuit granted a petition for leave to appeal.  Today, in an opinion by Judge Chagares, the Third Circuit affirmed, applying the de novo standard of review to the District Court’s decision on the motion to dismiss.

The key issue was whether the alleged overcharge constituted a misrepresentation “in connection with the purchase or sale” of a covered security.  Judge Chagares analyzed the two Supreme Court of the United States decisions that had addressed the meaning of “in connection with.”  Those decisions were Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71 (2006), which said that SLUSA applied where a fraud “coincides” with a securities transaction, and Chadbourne & Parke, LLP v. Troice, 571 U.S. 377 (2014).  Troice, the more recent case, clarified Dabit and stated that Dabit had held that a fraudulent misrepresentation or omission is not “in connection with” a purchase or sale of a covered security “unless it is material to a decision by one or more individuals (other than the fraudster) to buy or sell” a covered security.

Vanguard argued that Dabit, not Troice, governed because (1) Troice did not involve “covered securities” and (2) Troice did not modify Dabit.  Judge Chagares did not agree.  The fact that Troice did not involve covered securities was immaterial.  “The Supreme Court in Troice did not limit its reasoning to the uncovered/covered distinction, and we will not do so here.”  And though Troice expressly did not modify Dabit, it did echo Dabit in saying that materiality was the key to cases such as this.

Vanguard cited cases from the Seventh and Eighth Circuit Courts of Appeal that had barred customer claims under SLLUSA.  But Judge Chagares observed that those cases were distinguishable from today’s context.  They involved “the direct breach of a duty that the broker owes customers pertaining to a securities transaction,” such as the breaching the duty of best execution and taking secret side payments from mutual funds that the broker had traded, which should have been deposited into customers’ accounts.  “The misconduct in those cases was plainly material to brokerage customers, and the connection between the misconduct and the transaction was much closer than the connection between the overcharges and trades at issue here.”

Judge Chagares cited cases from the Seventh and Ninth Circuits that “concluded that inflated commissions do not trigger the SLUSA bar.”  The overcharges alleged here were immaterial since the represented reduced commissions were available only to customers with at least $500,000 invested in Vanguard accounts.  “In contrast with such significant investments, single-digit differences in trading commissions are objectively immaterial.”  And plaintiffs did not concede materiality by attempting to enforce their contractual right to the represented commissions.

Finally, Vanguard argued that plaintiffs had alleged a misrepresentation rather than a breach of contract, and that a misrepresentation claim would be barred by SLUSA.  Judge Chagares reiterated that what mattered here was that Vanguard had not done anything material to or “in connection with” the purchase or sale of covered securities.  Thus, even if plaintiffs were really alleging misrepresentation rather than breach of contract, SLUSA would not apply.