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