Rupnow v. E Trade Securities LLC

Background

Joshua Rupnow and Peter Szostak filed a proposed class action against ETRADE Securities, LLC. The complaint alleged that ETRADE’s customer agreement promised users an indicative, or estimated, borrowing rate for hard-to-borrow securities when they previewed a short-sale order. The plaintiffs alleged that E*TRADE did not provide that information before their trades and later deducted hard-to-borrow interest from their brokerage accounts.

Rupnow allegedly was charged $400.17 in hard-to-borrow interest after short trades in December 2017 and January 2018. Szostak allegedly was charged $1,829.03 for trades in June 2019, $624.17 for trades in July 2019, and $568.66 for trades in August 2019. The complaint asserted a breach-of-contract claim for ETRADE’s alleged failure to provide the indicative rate in the order-preview window. The proposed class covered ETRADE customers charged undisclosed interest on short sales of hard-to-borrow securities between November 26, 2013, and October 15, 2019.

**E*TRADE’s Arguments**

ETRADE moved to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. ETRADE argued that the Securities Litigation Uniform Standards Act, or SLUSA, preempted the claim. SLUSA can bar certain class actions based on state law when they allege material misrepresentations or omissions connected with securities transactions. ETRADE characterized the contract claim as a disguised claim that ETRADE failed to disclose the cost of shorting hard-to-borrow securities.

ETRADE also argued that the plaintiffs failed to plead a breach of contract because, in ETRADE’s view, the alleged nondisclosure could not have caused damages if the plaintiffs would have made the trades even after learning the rates.

Court’s Analysis

The court held that the claim was not preempted by SLUSA. It viewed the complaint as alleging that ETRADE failed to provide information in the manner promised by the customer agreement—not that ETRADE made a fraudulent misrepresentation or concealed a breach as part of a fraudulent scheme. The court noted that customers could obtain an estimated rate through E*TRADE’s customer-service process and could see total hard-to-borrow interest on monthly statements, even though the rate was not provided in the order-preview window and the statements did not connect the charge to a particular transaction.

The court also found that the complaint did not allege that E*TRADE entered the agreement intending not to perform, concealed its breach, or violated a legal duty separate from its contractual duty. Because the alleged obligation arose solely from the agreement, the court concluded that the plaintiffs had alleged a contract claim rather than a fraud claim for SLUSA purposes.

The court separately concluded that the plaintiffs plausibly alleged damages resulting from a breach. The complaint alleged that hard-to-borrow rates could be much higher than the rates listed in ETRADE’s online fee schedule. Whether the plaintiffs would have made the trades if they had received the indicative rates involved factual questions about causation that were not appropriate to resolve on a motion to dismiss. The court noted that ETRADE did not otherwise challenge the existence of the contract or the alleged breach.

Ruling

Judge Vernon S. Broderick denied ETRADE’s motion to dismiss. The court ordered ETRADE to file its answer to the complaint by February 10, 2022, and directed the Clerk to terminate the open motions at Documents 12 and 30. The order allowed the plaintiffs’ breach-of-contract claim to proceed but did not decide the ultimate merits of that claim.