New York Court Sides with Ameritrade – Redefines “Best Execution”

Justice for investors is simply denied in New York courts and a trend of no justice for investors threatens to spread nationwide as more and more “activist” business-friendly judges are appointed to the federal bench.

The U.S. District Court for the Southern District of New York, known to be friendly to Wall Street, has struck again, this time ruling Ameritrade was not required to route orders to multiple markets to fulfill its duty of “best execution” of trades. This is one of many case filed by investors which was dismissed, with prejudice, in a decision which could affect investors nationwide. (Gurfein v. Ameritrade Inc., S.D.N.Y., No. 04 Civ. 9526 (LLS), 7/17/07
Although language on Ameritrade, Inc.’s Website advertised that it had the capability of distributing customer orders to multiple markets and could thereby seek best execution, the judge decided this did not oblige Ameritrade to route orders to different markets for execution. The judge also found Ameritrade had no duty to the plaintiff to execute the limit order at the “best price” or fulfill the “best execution” regulatory requirement.

According to the court’s decision, the plaintiff repeatedly placed limit orders in her Ameritrade account to sell options at the bid price shown on her computer. When the first transaction failed to be executed, she cancelled the order and repeated the process multiple times. Ameritrade later stated that it routes such orders only to the American Stock Exchange (Amex), and never to the Chicago Board Options Exchange or the Philadelphia Stock Exchange where the options were also listed.

The judge stupidly claimed that sending orders to several places may result in multiple executions. Your Honor, I have one word for you: “computers!” It is simple to program coumputers to locate the best prices on multiple markets ard route orders there. Most 8th graders could do it!

A complaint was filed under securities laws but was dismissed in January. A second complaint was then filed claiming breach of contract against Ameritrade for failing to execute the options orders, which the court also dismissed. This, the third complaint, revised breach of contract claim and included failing to execute the order at the “best” price, or with the best execution. Ameritrade again sought summary judgment which was granted, this time with prejudice.

Dismissal of the contract claims is problematic. While the language relied upon could be considered ambiguous, non-waiver provisions of fraud laws and concerning fiduciary duty claims should have prevented any such language to cause a waiver of the investor’s claims.

Yet, of primary concern to observers, is the status of the duty of “best execution” and other requirements of securities regulations. Securities regulations require best execution and courts have for decades held that, when orders are received, brokerage firms have a fiduciary duty to their clients of best execution – timely execution at the best available price.

The New York Court simply ignored such regulations, stating that such regulations did not create any duty for Ameritrade and others in the securities industry and, even if the regulations were violated, this did not give victims a right to recovery. For decades, courts have held that violations of securities regulations are evidence of breach of fiduciary duty, breach of contract and are actionable under other legal claims. One description of the duty is based on the “shingle theory” – that when one hangs a shingle as a member of the securities industry that person can be expected to follow such rules.

As a comparison: There is no “private right of action” if someone runs into your car while speeding or running a stop sign. However, violations of traffic laws are evidence of negligence and other legal claims. We all have a duty to not to act negligently and kill or injure others, or destroy their vehicle. This judge decided that when members of the securities industry violate the “traffic” laws for securities firms, this does not give investors the right to seek damages for such wrongful behavior.

Let’s face it. There are rules for the securities industry and other rules for the rest of us. Meanwhile, judges who are “activist” on behalf of the business community are being appointed to replace those accused of being “activists” regarding the rights of the rest of us. Oh, and your “honor,” I actually have a few more words for you.

Shepherd Smith and Edwards represents investors nationwide in arbitration claims against those in the securities industry. If you, your firm or your pension fund has sustained losses as a result of fraud, negligence or other wrongdoing contact us to arrange a free consultation with one of our attorneys.

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