                United States Court of Appeals
                            For the Eighth Circuit
                        ___________________________

                                No. 16-3013
                        ___________________________

                       Jay Zola; Jeremiah Joseph Lowney

                      lllllllllllllllllllll Plaintiffs - Appellants

                                           v.

               TD Ameritrade, Inc.; TD Ameritrade Clearing, Inc.

                     lllllllllllllllllllll Defendants - Appellees
                        ___________________________

                                No. 16-3016
                        ___________________________

Tyler Verdieck, A California Citizen, Individually, And On Behalf Of All Others
                              Similarly Situated

                       lllllllllllllllllllll Plaintiff - Appellant

                                           v.

                 TD Ameritrade, Inc., a New York Corporation

                      lllllllllllllllllllll Defendant - Appellee
                        ___________________________

                                No. 16-3019
                        ___________________________

  Michael Sarbacker, Individually and on behalf of all others similarly situated

                       lllllllllllllllllllll Plaintiff - Appellant

                                           v.
    TD Ameritrade Holding Corporation; TD Ameritrade, Inc.; TD Ameritrade
               Clearing, Inc.; Frederic J. Tomczyk; Paul Jiganti

                       lllllllllllllllllllll Defendants - Appellees
                                        ____________

                     Appeals from United States District Court
                       for the District of Nebraska - Omaha
                                  ____________

                           Submitted: December 12, 2017
                               Filed: May 10, 2018
                                  ____________

Before WOLLMAN, LOKEN, and MELLOY, Circuit Judges.
                         ____________

WOLLMAN, Circuit Judge.

       Jay Zola and Jeremiah Joseph Lowney (collectively, Zola), Tyler Verdieck, and
Michael Sarbacker filed separate class-action complaints against TD Ameritrade, Inc.,
alleging various state-law claims.1 The complaints alleged that TD Ameritrade
breached its duty of best execution when it routed client orders to buy and sell
securities to trading venues that paid TD Ameritrade top dollar for its order flow. The
district court2 dismissed the complaints for failure to state a claim after concluding
that the claims were precluded by the Securities Litigation Uniform Standards Act of
1998 (SLUSA). See 15 U.S.C. § 78bb(f)(1). Having reviewed the dismissal de novo,

      1
      The plaintiffs also sued entities and individuals related to TD Ameritrade, Inc.
We will refer to the defendants collectively as TD Ameritrade.
      2
      The Honorable Joseph F. Bataillon, United States District Judge for the District
of Nebraska, adopting in relevant part the Findings and Recommendation of the
Honorable Thomas D. Thalken, United States Magistrate Judge for the District of
Nebraska, now retired.

                                           -2-
we affirm. See Lewis v. Scottrade, Inc., 879 F.3d 850, 851 (8th Cir. 2018), deadline
for filing petition for cert. extended to May 9, 2018, (standard of review).

                                    I. Background

       TD Ameritrade provides brokerage services to retail investors. Its clients place
orders to buy and sell securities with TD Ameritrade, which then directs the orders to
trading venues that execute the transactions. The plaintiffs alleged that TD
Ameritrade failed to direct client orders to the trading venues that offered the “best
execution” possible for the order—that is, the best price, speed of execution, and
likelihood that the trade would be executed. TD Ameritrade instead directed the
orders to the trading venues that were willing to pay TD Ameritrade “kickbacks,” i.e.,
rebates or payments for order flow.

       According to the plaintiffs, those trading venues catered to high-frequency
traders, which use sophisticated algorithms, advanced technology, and physical
proximity to stock exchange servers to quickly detect and trade on subtle market
signals. For example, Zola alleged that high-frequency traders engage in a practice
called “electronic front-running,” Zola Compl. ¶ 11, “meaning that they detect
patterns involving large incoming trades, and then execute their own trades before
those incoming trades are completed,” Waggoner v. Barclays PLC, 875 F.3d 79, 86
(2d Cir. 2017), petition for cert. filed, 86 U.S.L.W 3455 (U.S. Feb. 26, 2018) (No. 17-
1209). This practice “results in the incoming trades being more costly or less lucrative
for the individuals or institutions making them.” Id. at 86-87. Similarly, Verdieck and
Sarbacker alleged that TD Ameritrade directed non-marketable limit orders to Direct
Edge, which then executed those orders more slowly and at a less competitive price
than the orders of the high-frequency traders.3

      3
        “A ‘limit’ order is an order to buy or sell a specific number of shares of a
security at a specific or better price.” Lewis, 879 F.3d at 851. A non-marketable limit
order is an order that cannot be executed immediately because no market participant

                                          -3-
       Zola and Sarbacker alleged that TD Ameritrade breached its uniform client
agreement when it failed to consider certain factors in deciding where to direct client
orders and instead considered only the trading venues that were willing to pay a
premium for TD Ameritrade’s order flow.4 Sarbacker also alleged claims of fraud,
negligent misrepresentation, violations of the Nebraska Consumer Protection Act, and
aiding and abetting. Verdieck alleged that TD Ameritrade breached its fiduciary duty
of best execution by directing non-marketable limit orders to Direct Edge. The three
complaints involve similar factual allegations: that TD Ameritrade devised a scheme
to maximize its receipt of rebates and payments at the expense of its clients by
knowingly routing orders to trading venues where high-frequency traders could
manipulate and exploit the slower execution of TD Ameritrade’s client orders. Those
trading venues paid TD Ameritrade handsomely for its order flow. According to
Zola’s complaint, for example, the three trading venues to which TD Ameritrade
directed more than 90 percent of its orders from 2011 through 2013 paid more than
$600 million for the order flow. Zola, Verdieck, and Sarbacker claim as damages
those rebates or payments that TD Ameritrade received.




is willing to trade at the price of the order.
       4
        The uniform client agreement provides, in relevant part:

       [TD Ameritrade] consider[s] a wide variety of factors in determining
       where to direct [client] orders, such as execution price, opportunities for
       price improvement (which is when an order is executed at a price that is
       more favorable than the displayed national best bid or offer), market
       depth, order size and trading characteristics of the security, efficient and
       reliable order handling systems and market center service levels, speed,
       efficiency, accuracy of executions, and the cost of executing orders at a
       market.


                                           -4-
                                     II. Discussion

       Congress passed the Private Securities Litigation Reform Act (PSLRA) in 1995
to curb “perceived abuses” of federal class-action securities litigation by imposing
special requirements and obstacles on plaintiffs filing such actions. Merrill Lynch,
Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 81 (2006). Plaintiffs responded
to the PSLRA by bringing “class actions under state law, often in state court,” in an
attempt to “avoid the federal forum altogether.” Id. at 82. Accordingly, Congress
enacted SLUSA in 1998 to close the gap in PSLRA coverage and “prevent certain
State private securities class action lawsuits alleging fraud from being used to frustrate
the objectives of” the PSLRA. Id.

       SLUSA requires the district court to dismiss any “covered class action” in
which the plaintiff alleges “a misrepresentation or omission of a material fact in
connection with the purchase or sale of a covered security” or “that the defendant used
or employed any manipulative or deceptive device or contrivance in connection with
the purchase or sale of a covered security.” 15 U.S.C. § 78bb(f)(1). It is undisputed
that the complaints here alleged “covered class actions” and that the transactions at
issue involved “covered securities.”5

       Our recent decision in Lewis v. Scottrade, Inc., 879 F.3d 850 (8th Cir. 2018),
guides our analysis in this case. In Lewis, we addressed the two issues presented in
these consolidated appeals: whether the complaints alleged (1) “a misrepresentation
or omission” or “a manipulative or deceptive device or contrivance” that was (2) “in
connection with the purchase or sale of a covered security.” Id. at 852. Lewis’s
complaint alleged that he had placed non-directed standing limit orders through the
broker Scottrade, which violated its duty of best execution by routinely routing such

      5
       A “covered class action” is defined as a lawsuit in which damages are sought
on behalf of fifty or more people; a “covered security” is defined as a security listed
on a national stock exchange. 15 U.S.C. § 78bb(f)(5)(B) and (E).
                                           -5-
orders to trading venues that paid it large rebates. Lewis pleaded only state-law
claims, including breach of fiduciary duty. We concluded that SLUSA precluded the
claims and affirmed the dismissal of Lewis’s complaint for failure to state a claim.

                 A. “Misrepresentation or Omission” Requirement

       Zola and Verdieck argue that SLUSA does not preclude their claims because
their complaints did not allege any “misrepresentation or omission of a material fact”
or the use or employment of “any manipulative or deceptive device or contrivance.”
Zola argues that he has alleged a straightforward breach of contract claim: TD
Ameritrade’s uniform client agreement states that it would consider certain factors in
directing orders, and it did not consider those factors. Similarly, Verdieck contends
that he alleged only that TD Ameritrade breached its duty to execute trades on terms
most favorable to its clients, which he claims constitutes misconduct that “require[d]
TD Ameritrade to act, and neither disclosures nor omissions ha[d] any impact on TD
Ameritrade’s obligation to fulfill its duties.” Verdieck’s Br. 21 (emphasis omitted).

        To determine whether a plaintiff has alleged a misrepresentation or omission
of a material fact, we “look at the substance of the allegations, based on a fair reading”
of the complaint. Kutten v. Bank of Am., N.A., 530 F.3d 669, 670 (8th Cir. 2008).
What matters is “the conduct alleged, not the words used to describe the conduct.”
Id. at 671; see Segal v. Fifth Third Bank, N.A., 581 F.3d 305, 311 (6th Cir. 2009) (“It
is whether the complaint covers the prohibited theories, no matter what words are used
(or disclaimed) in explaining them.”). “SLUSA applies if the gravamen of a state law
claim ‘involves an untrue statement or substantive omission of a material fact in
connection with the purchase or sale of a covered security.’” Lewis, 879 F.3d at 854
(quoting Dudek v. Prudential Secs., Inc., 295 F.3d 875, 879 (8th Cir. 2002)).
Moreover, Lewis instructs that a plaintiff has alleged a misrepresentation or omission
when “the core of [the plaintiff’s] complaint is that [the broker] did not disclose its



                                           -6-
practice of not obtaining best execution, permitting it to acquire and retain trading
venue rebates contrary to its customers’ interests.” Id.

        Although they carefully avoided allegations that explicitly sounded in fraud
(words like misrepresentation, omission, or deception are absent from their
complaints), Zola’s and Verdieck’s claims nonetheless are grounded in TD
Ameritrade’s failure to disclose the fact that it was selling its order flow to the highest
bidders, i.e., trading venues that catered to high-frequency traders. By routing order
flow to those venues, TD Ameritrade enabled high-frequency traders to manipulate
the price of the securities, to the detriment of the plaintiffs. Zola’s and Verdieck’s
complaints are not materially different from the complaint in Lewis, and we thus
conclude that the gravamen of their claims involves a misrepresentation or omission
of a material fact in connection with the purchase or sale of a covered security. See
Fleming v. Charles Schwab Corp., 878 F.3d 1146, 1154 (9th Cir. 2017), deadline for
filing petition for cert. extended to April 30, 2018, (holding that SLUSA precluded
what might otherwise have been merely a breach of contract claim, but what in
substance alleged a deceptive practice because the broker “motivated by a conflict of
interest, deceived Plaintiffs into believing it would deliver best execution of their
trades but knew that sending all trades to UBS would breach that duty”); Holtz v.
JPMorgan Chase Bank, N.A., 846 F.3d 928, 932 (7th Cir. 2017) (“[A] broker-dealer
that fails to achieve best execution for a customer by arranging a trade whose terms
favor the dealer rather than the client has a securities problem, not just a state-law
contract or fiduciary-duty problem.”).

       We reject Zola’s argument that characterizing his complaint as alleging an
omission of material fact could recast any breach of contract claim into a fraud claim.
SLUSA does not preclude “genuine contract action[s].” Kurz v. Fidelity Mgmt. &
Research Co., 556 F.3d 639, 641 (7th Cir. 2009); see, e.g., Freeman Invs., L.P. v. Pac.
Life Ins. Co., 704 F.3d 1110, 1115 (9th Cir. 2013); Green v. Ameritrade, 279 F.3d
590, 598 (8th Cir. 2002) (holding that SLUSA did not preclude a breach of contract

                                           -7-
claim alleging that the plaintiff “did not receive the type of information from
Ameritrade for which he believed he had contracted and paid twenty dollars
monthly”); see also Fleming, 878 F.3d at 1153 (explaining that SLUSA would not
preclude “a claim that [the broker] charged Plaintiffs $10 for executing a trade, despite
a contract providing for a $5 charge”).

       Zola’s complaint does not allege a typical contract dispute. There is a
disconnect between the alleged breach (TD Ameritrade’s failure to consider the
factors set forth in the client agreement) and the damages sought (disgorgement of
profits) based on TD Ameritrade’s misconduct (engaging in a secret scheme to
increase its profits at the expense of its clients). Fairly read, the wrongdoing alleged
in Zola’s complaint is not the failure to consider certain factors in directing orders, but
rather the covert placement of orders with venues that catered to high-frequency
traders. We conclude that Zola has attempted to style his federal securities claim as
a breach of contract claim in an effort to avoid the strictures of the PSLRA. See
Holtz, 846 F.3d at 931 (“The possibility that plain vanilla contract claims can proceed
under state law creates an incentive to characterize all securities claims as ‘contract’
suits and avoid federal preemption.”).7

                     B. The “In Connection With” Requirement

     The Supreme Court interprets SLUSA’s “in connection with” provision the
same way it interprets the phrase “in connection with the purchase or sale of any


      7
        Zola argues that the district court erred in denying him leave to amend his
breach of contract claim. Zola did not submit a proposed amended complaint,
however, nor did he explain what changes he would have made to avoid SLUSA
preclusion. We fail to see how an amendment could save his claim from dismissal and
thus affirm the denial of leave to amend on the grounds of futility. See Siepel v. Bank
of Am., N.A., 526 F.3d 1122, 1128 (8th Cir. 2008) (“review[ing] de novo the
underlying legal conclusion of whether the proposed amendment would have been
futile”).
                                           -8-
security” of Section 10(b) of the Securities and Exchange Act of 1934. Section
10(b)’s statutory language is “construed not technically and restrictively but flexibly
to effectuate its remedial purpose.” S.E.C. v. Zandford, 535 U.S. 813, 819 (2002)
(internal quotation marks and citation omitted). Accordingly, in Merrill Lynch,
Pierce, Fenner & Smith v. Dabit, the Court explained that to meet SLUSA’s “in
connection with” requirement, “it is enough that the fraud alleged ‘coincide’ with a
securities transaction—whether by the plaintiff or by someone else.” 547 U.S. at 85;
see Siepel v. Bank of Am., N.A., 526 F.3d 1122, 1127 (8th Cir. 2008).

       Verdieck and Sarbacker argue that the standard set forth in Dabit no longer
applies in light of the Supreme Court’s decision in Chadbourne & Parke LLP v.
Troice, 134 S. Ct. 1058 (2014), which they contend “broke new ground illuminating
the contours of the ‘in connection with’ requirement by doing away with the
amorphous ‘coincide’ standard.” Verdieck’s Reply Br. 2; see Sarbacker’s Reply Br.
2. They argue that the purchase or sale of the security must be “induced by the fraud”
to meet SLUSA’s “in connection with” requirement and that TD Ameritrade’s
misconduct did not affect their decisions to buy or sell a covered security even though
the misconduct might have affected their decisions to place orders with TD
Ameritrade, as opposed to some other broker.

       In Chadbourne, the plaintiffs had purchased uncovered securities, but alleged
that the defendants had represented that those securities were backed by covered
securities. The Supreme Court thus considered whether SLUSA “extend[ed] further
than misrepresentations that are material to the purchase or sale of a covered security.”
134 S. Ct. at 1066. It held that SLUSA did not apply, in part, because SLUSA
“expresses no concern” about the decision “to purchase or to sell an uncovered
security.” Id. More to the point here, the Court set forth the “coincide” standard and
stated, “We do not here modify Dabit.” 134 S. Ct. at 1066.

       In Lewis, we thus rejected the argument that Chadbourne changed the standard
set forth in Dabit. We also determined that Chadbourne did not apply in Lewis’s case

                                          -9-
because the “alleged misconduct induced customers to place limit orders for covered
securities with Scottrade.” Lewis, 879 F.3d at 853; see Goldberg v. Bank of Am.,
N.A., 846 F.3d 913, 916 (7th Cir. 2017) (per curiam) (explaining that Chadbourne
“holds that [SLUSA] does not apply when the customer invests in an asset that does
not consist of, or contain, covered securities”). We rejected the contention that
Scottrade’s misconduct did not affect Lewis’s decision to buy or sell a covered
security, concluding that the broker’s “failure to provide best execution was material
to every trade in covered securities that customer Lewis chose to have Scottrade
execute.” 879 F.3d at 853. “The alleged misconduct—not disclosing that it would
breach the duty of best execution—produced ill-gotten revenue for Scottrade each
time it executed an order to buy or sell covered securities for its duped customer.” Id.

       The reasoning in Lewis applies with equal force here. There is no dispute that
Verdieck and Sarbacker purchased or sold “covered securities.” Moreover, TD
Ameritrade garnered rebates and payments whenever it routed orders to buy or sell
securities for its clients. We thus conclude that Verdieck’s and Sarbacker’s arguments
are foreclosed. See Lewis, 879 F.3d at 853-54 (concluding that “fraud or deception
in trading that violates a broker’s duty of best execution is misconduct ‘in connection
with’ the purchase and sale of covered securities”); Kurz, 556 F.3d at 641 (rejecting
as “frivolous” the contention that the duty of best execution is not “in connection
with” the purchase or sale of securities).

      The judgment is affirmed.8
                      ______________________________




      8
       We grant Verdieck’s motion for judicial notice of the amended complaint in
Klein v. TD Ameritrade Holding Corp., No. 8:14cv396 (D. Neb.). Because we have
considered Zola’s and Sarbacker’s complaints in deciding their appeals, we deny as
moot Verdieck’s motion as to those pleadings.
                                         -10-
