Charles Schwab Investors Renew Bid for Class Certification in Securities Fraud Suit

In their second bite at the apple, the investors accusing The Charles Schwab Corporation and non-party UBS Securities LLC of an illicit agreement to siphon money from client trades said their motion now satisfies the requirements for class certification in the securities fraud case.

Last week’s filing first points to a 2004 deal under which Schwab sold its capital markets division to UBS for $265 million. “As an integral part of that transaction, Schwab and UBS entered into the Equities Order Handling Agreement (EOHA), which contractually required Schwab to route the vast majority of its non-directed customer equity orders to UBS,” the motion said.

Critically, the suit explained that Schwab omitted critical facts from its clients with regard to “non-directed equity orders to UBS,” between 2011 and 2014. Though promised the best possible execution with regular quality monitoring, the financial fraud action claimed that the investors received inferior executions.

Because Schwab automatically routed its customers’ orders to UBS it permitted UBS to handle them in ways that elevated its self-interest above that of customers, the motion said. Specifically, UBS benefitted by “trading against those orders for UBS’s own account, allowing UBS customers to trade against those orders, or simply routing them onward to other destinations that would pay UBS for providing the orders, regardless of whether that destination would provide best execution.”

In addition, Schwab reaped the benefits of the agreement by, beginning in November 2012, and pursuant to the EOHA, receiving tens of millions of dollars per year. The payouts from UBS came in the form of periodic “payment for order flows” or volume-based payments based on the total number of orders Schwab routed to UBS.

The suit claimed that investors sustained monetary damages resulting from Schwab’s representations that they were receiving the best execution for their orders when in actuality, they were not.

Previously, Judge Richard Seeborg denied the plaintiffs’ motion for class certification on the basis that “no presumption of reliance applies, and so commonality and predominance were lacking.” The plaintiffs unsuccessfully appealed.

Now, and pivoting from their previous tack, the plaintiffs seek certification under Federal Rule of Civil Procedure 23(c)(4) with respect to the issues of falsity, scienter, and the presence of a scheme.

“Because those issues focus exclusively on Schwab’s uniform conduct identically affecting all Class members, they can be proven by common evidence, and easily satisfy the Rule 23(a) factors,” the plaintiffs contended.

The motion also seeks appointment of two lead plaintiffs and appointment of Glancy Prongay & Murray LLP, Bragar Eagel & Squire P.C., and Levi & Korsinsky LLP as class counsel. Charles Schwab is represented by Arnold & Porter Kaye Scholer LLP and Sidley Austin LLP.