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Robert Crago, Et Al. V. the Charles Schwab Corporation, Et Al. 16-CV

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Robert Crago, Et Al. V. the Charles Schwab Corporation, Et Al. 16-CV Case 3:16-cv-03938-RS Document 48 Filed 01/20/17 Page 1 of 46 1 LIONEL Z. GLANCY (#134180) [email protected] 2 ROBERT V. PRONGAY (#270796) [email protected] 3 JOSHUA L. CROWELL (#295411) 4 [email protected] GLANCY PRONGAY & MURRAY LLP 5 1925 Century Park East, Suite 2100 Los Angeles, California 90067 6 Telephone: (310) 201-9150 Facsimile: (310) 201-9160 7 8 LAWRENCE P. EAGEL [email protected] 9 J. BRANDON WALKER [email protected] 10 TODD H. HENDERSON 11 [email protected] BRAGAR EAGEL & SQUIRE, P.C. 12 885 Third Avenue, Suite 3040 New York, New York 10022 13 Telephone: (212) 308-5858 Facsimile: (212) 486-0462 14 15 Attorneys for Lead Plaintiffs Robert Wolfson and Frank Pino and Co-Lead Counsel for the Class 16 17 UNITED STATES DISTRICT COURT 18 NORTHERN DISTRICT OF CALIFORNIA 19 SAN FRANCISCO DIVISION 20 21 ROBERT CRAGO, Individually and on Case No. 3:16-cv-03938-RS 22 Behalf of All Others Similarly Situated, AMENDED CLASS ACTION 23 Plaintiff, COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS 24 v. DEMAND FOR JURY TRIAL 25 CHARLES SCHWAB & CO., INC., and THE 26 CHARLES SCHWAB CORPORATION, The Hon. Richard G. Seeborg 27 Defendants. 28 AMENDED CLASS ACTION COMPLAINT 351199.1 SCHWAB Case No. 3:16-cv-03938-RS Case 3:16-cv-03938-RS Document 48 Filed 01/20/17 Page 2 of 46 1 TABLE OF CONTENTS Page 2 I. PRELIMINARY STATEMENT ........................................................................................... 2 3 II. JURISDICTION AND VENUE ............................................................................................ 4 4 III. PARTIES ............................................................................................................................... 4 5 6 IV. FACTUAL BACKGROUND AND SUBSTANTIVE ALLEGATIONS ............................ 5 7 A. Schwab Is a Discount Stock Broker That Generates Revenue From Trade Commissions and Payments for Order Flow ............................................................. 5 8 B. Schwab Had a Duty of Best Execution and Represented That It Was 9 Committed to Obtaining the Best Execution Possible for Its Customers ................. 6 10 C. Schwab’s Routing Practices Resulted in Systematic Violations of Its Duty of Best Execution .................................................................................................... 10 11 12 1. Schwab Entered Into an Agreement Requiring Schwab to Rout More Than 95% of Non-Directed Orders to UBS ................................................ 10 13 2. Schwab’s Agreement With UBS Resulted in Extreme and Anomalous Order Flow Inconsistent with Best Execution ............................................. 13 14 3. Schwab’s Routing of Substantially All of Its Non-Directed Order Flow 15 to UBS Created an Inherent Conflict of Interest ......................................... 15 16 4. By Routing Substantially All of Its Non-Directed Order Flow to UBS, Schwab Failed to Satisfy Its Duty of Best Execution to Its Clients ............ 19 17 V. ADDITIONAL ALLEGATIONS OF DEFENDANTS’ SCIENTER ................................ 30 18 VI. DEFENDANTS’ MATERIALLY FALSE AND MISLEADING STATEMENTS 19 AND OMISSIONS .............................................................................................................. 32 20 VII. PRESUMPTION OF CLASS-WIDE RELIANCE ............................................................. 34 21 VIII. LOSS CAUSATION AND DAMAGES ............................................................................. 34 22 IX. INAPPLICABILITY OF THE STATUTORY SAFE HARBOR AND BESPEAKS CAUTION DOCTRINE ...................................................................................................... 35 23 24 X. STATUTE OF LIMITATIONS .......................................................................................... 36 25 XI. CLASS ACTION ALLEGATIONS .................................................................................... 38 26 XII. CLAIM FOR RELIEF ......................................................................................................... 40 27 XIII. PRAYER FOR RELIEF ...................................................................................................... 42 28 XIV. JURY DEMAND ................................................................................................................ 42 AMENDED CLASS ACTION COMPLAINT 351199.1 SCHWAB Case No. 3:16-cv-03938-RS Case 3:16-cv-03938-RS Document 48 Filed 01/20/17 Page 3 of 46 1 Lead Plaintiffs Robert Wolfson and Frank Pino (“Lead Plaintiffs”), individually and on behalf 2 of all other persons similarly situated, by their undersigned attorneys, for their Amended Class Action 3 Complaint against Defendants The Charles Schwab Corporation (“Schwab Corp.”) and Charles 4 Schwab & Co., Inc. (“Schwab & Co.”) (together, Schwab Corp. and Schwab & Co. are “Schwab” or 5 “Defendants”), allege the following based upon personal knowledge as to themselves and their own 6 acts and information and belief as to all other matters based upon the investigation of their counsel, 7 which included a review of Schwab’s filings with the U.S. Securities and Exchange Commission 8 (“SEC”), as well as regulatory filings and reports, press releases, and other public statements issued by 9 and about Schwab, various agreements between Schwab and its clients, and other publicly available 10 reports and articles. Lead Plaintiffs believe that additional evidentiary support will exist for the 11 allegations set forth herein after a reasonable opportunity for discovery. 12 I. PRELIMINARY STATEMENT 13 1. This is a securities class action on behalf of all clients of Schwab between July 13, 14 2011 and July 13, 2016 (the “Class Period”) who placed trade orders that were routed to UBS 15 Securities LLC (“UBS”), in a manner inconsistent with Schwab’s duty of best execution. Lead 16 Plaintiffs bring their claims pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 17 1934 (the “Exchange Act”), 15 U.S.C. § 78j(b) and 78t, and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, 18 promulgated thereunder. 19 2. Schwab is one of the largest retail broker-dealers in the world, routing its clients’ trade 20 orders to various venues for execution. All brokers are under a duty of “best execution,” which means 21 that, as required by FINRA Rule 5310, Schwab must “use reasonable diligence to ascertain the best 22 market . so that the resultant price to the customer is as favorable as possible.” Similarly, in its 23 Order Execution Obligations Release, No. 34-37619A, the SEC states that the duty of best execution, 24 which is incorporated into the antifraud provisions of the federal securities laws, requires a broker “to 25 seek the most favorable terms reasonably available under the circumstances for a customer’s 26 transactions.” 27 3. Throughout the Class Period, Schwab represented in public statements and documents 28 that it assiduously sought best execution for its clients. For example, in the account agreement that all AMENDED CLASS ACTION COMPLAINT 351199.1 SCHWAB Case No. 3:16-cv-03938-RS 2 Case 3:16-cv-03938-RS Document 48 Filed 01/20/17 Page 4 of 46 1 Schwab retail broker clients executed, Schwab represented that “[it] consider[ed] a number of factors 2 in evaluating execution quality among markets and firms, including [inter alia] execution price and 3 opportunities for price improvement [over the National Best Bid and Offer for the security in 4 question]. .” The agreement also represented that “Schwab regularly monitor[ed] the execution 5 obtained to ensure orders are routed to market venues that have provided high-quality executions over 6 time.” In reliance on these representations and others, Lead Plaintiffs and other members of the Class 7 placed numerous trade orders with Schwab. 8 4. In fact, however, Schwab’s trade routing practices were diametrically opposed to its 9 representations of faithfully complying with its duty of best execution. Instead of monitoring and 10 evaluating execution quality among various trading venues and, based upon various factors, selecting 11 the venues that obtained best execution for its clients, for most of the Class Period, Schwab 12 mechanically routed upwards of 95% of its trade orders to a single venue – wholesale market maker 13 UBS. Schwab did so as required by an agreement with UBS that paid Schwab approximately 14 $100 million per year. In view of the 95% requirement, Schwab did not – and could not – consider 15 execution price, opportunities for price improvement, or other best execution factors in its trade 16 routing decisions. In contrast, competing retail brokers that did not accept so-called payments for 17 order flow routed its clients’ orders to a diverse set of venues. 18 5. Schwab’s payment for order flow arrangement created a conflict of interest because 19 UBS did not intend to execute orders on terms most favorable to Schwab’s clients. Once Schwab 20 routed its clients’ trade orders to UBS, UBS was able to profit off of Schwab’s captive order flow by 21 doing one of the following: (1) internalizing the trade, i.e., matching the order internally without 22 necessarily providing best execution by re-routing to a different market venue with a better price; (2) 23 placing the trade in the UBS dark pool, thereby exposed to predatory high-frequency traders; or (3) re- 24 routing the trade in a manner allowing UBS to obtain an order flow rebate. In return, Schwab clients 25 were deprived of the most favorable price, instead receiving minimal – often subpenny – price 26 improvement. As Defendants
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