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12/24/96 ROBERT ORMAN v. CHARLES SCHWAB & COMPANY

December 24, 1996

ROBERT ORMAN, ON BEHALF OF HIMSELF AND ALL SIMILARLY SITUATED SCHWAB CUSTOMERS, PLAINTIFF-APPELLANT,
v.
CHARLES SCHWAB & COMPANY, INC., DEFENDANT-APPELLEE. GORDON RUBENSTEIN, ON BEHALF OF HIMSELF AND ALL SIMILARLY SITUATED QUICK AND REILLY CUSTOMERS, PLAINTIFF-APPELLANT, V. QUICK AND REILLY, INC., AND UNITED STATES CLEARING CORPORATION, DEFENDANTS-APPELLEES. LEONARD M. BLAND, ON BEHALF OF HIMSELF AND ALL SIMILARLY SITUATED OLDE DISCOUNT CORPORATION CUSTOMERS, PLAINTIFF-APPELLANT, V. OLDE DISCOUNT CORPORATION, DEFENDANT-APPELLEE.



Appeal from the Circuit Court of Cook County. Honorable Edward C. Hofert, Judge Presiding. Honorable Arthur L. Dunne, Judge Presiding. Honorable Arthur L. Dunne, Judge Presiding.

Released for Publication February 13, 1997.

The Honorable Justice Rakowski delivered the opinion of the court. McNAMARA, J., concurs. Zwick, P.j., dissenting.

The opinion of the court was delivered by: Rakowski

JUSTICE RAKOWSKI delivered the opinion of the court:

Plaintiffs, Robert Orman, Gordon Rubenstein, and Leonard M. Bland (customers) filed complaints against defendants, Charles Schwab & Co., Quick & Reilly, Inc., and Olde Discount Corporation (brokers), respectively, alleging that brokers violated state common and statutory law when they conducted stock trades on behalf of customers. In particular, the brokers breached their fiduciary duties by keeping certain profits (order flow payments) without adequate disclosure to or authorization from the customers. Each suit was dismissed on the brokers' combination motions under sections 2-615 and 2-619 of the Code of Civil Procedure. 735 ILCS 5/2-615, 5/2-619 (West 1994). The trial court, in each case, found that the customers' claims were preempted by federal law. Plaintiffs appeal, contending the trial courts erroneously held that their actions were preempted. The cases were consolidated for appeal.

The sole issue is whether the customers' claims based on state common and statutory law are preempted by the Securities Exchange Act of 1934 (the Act) (15 U.S.C. § 78a et seq. (1994)). We affirm.

FACTS

As stated in the facts by the parties, pursuant to standard form contracts between the customers and brokers, each broker was employed to buy and/or sell stocks on the customers behalf, for which the broker would received a commission. In such capacity, the broker acted as the customer's agent. When a customer placed an order, the broker could execute it in various markets. The broker would contact a market maker of its choice to effectuate the required trade. The price obtained was negotiated between the broker and the market maker. The market maker made a profit on every trade. To induce brokers to deal through them, market makers shared part of their profit with the brokers. This practice is known as order flow payments. It is a recognized and widespread practice in the industry and part of the competitive market.

Brokers retained the order flow payments and did not pass them on to customers. In their complaints, plaintiffs allege that the brokers breached their fiduciary duties by retaining the payments without adequate disclosure to them or authorization from them. Subsequent to each transaction, the broker sent a confirmation slip to the customer containing the disclosure required by the Securities and Exchange Commission (the SEC); however, the brokers did not disclose order flow payments.

Plaintiffs filed suits alleging claims for breach of fiduciary duty, unjust enrichment, unfair and deceptive business practices, and breach of contract based on the brokers' retention of the order flow payments.

ANALYSIS

"The purpose of a motion to dismiss under section 2-619 *** is to afford litigants a means to dispose of issues of law and easily proved issues of fact at the outset of a case, reserving disputed questions of fact for a jury trial." Zedella v. Gibson, 165 Ill. 2d 181, 185, 209 Ill. Dec. 27, 650 N.E.2d 1000 (1995). All well-pleaded facts in the complaint are admitted, but conclusions of law and fact unsupported by specific allegations are not. Draper v. Frontier Insurance Co., 265 Ill. App. 3d 739, 742, 203 Ill. Dec. 50, 638 N.E.2d 1176 (1994). The trial court must construe the motion and supporting documents in the light most favorable to the nonmovant. Draper, 265 Ill. App. 3d at 742. "Section 2-619(a)(9) allows dismissal when 'the claim asserted *** is barred by other affirmative matter avoiding the legal effect of or defeating the claim.' " Zedella, 165 Ill. 2d at 185, quoting Ill. Rev. Stat. 1991, ch. 110, par. 2-619. Preemption is an affirmative matter. Russo v. Boland, 103 Ill. App. 3d 905, 909-10, 59 Ill. Dec. 537, 431 N.E.2d 1294 (1982). "The question on appeal is 'whether the existence of a genuine issue of material fact should have precluded the dismissal or, absent such an issue of fact, whether dismissal is proper as a matter of law.' " Zedella, 165 Ill. 2d at 185-86, quoting Kedzie & 103rd Currency Exchange, Inc. v. Hodge, 156 Ill. 2d 112, 116-17, 189 Ill. Dec. 31, 619 N.E.2d 732 (1993). We review the trial court's decision de novo. Kedzie, 156 Ill. 2d at 116.

Congress promulgated the Act, which created the SEC and delegated to it the responsibility for oversight of the securities industry. Federal oversight was designed to: (1) protect the investing public; (2) remove impediments to smooth operation of the national market; and (3) impose reporting requirements that ensure a fair and honest market. Dahl v. Charles Schwab & Co., 545 N.W.2d 918, 924 (Minn. 1996). In 1977, the SEC adopted Rule 10b-10, which outlined the necessary disclosure brokers were required to furnish their its clients. 17 C.F.R. 240.10b-10 (1994). Rule 10b-10 mandated brokers to furnish written notification at or before completion of a transaction, which included:

"The source and amount of any other remuneration received or to be received by him in connection with the transaction: Provided, however, *** the written notification may state whether any other remuneration has been or will be received and that the source and amount of such other remuneration will be furnished upon written request of such customer." 17 C.F.R. 240.10b-10(a)(7)(iii) (1994).

Originally, the rule made no specific reference to order flow payments.

The rule was amended effective October 2, 1995, which added disclosure requirements concerning order flow payments. The rule now states that brokers must provide customers with: "a statement whether payment for order flow is received by the broker or dealer for transactions in such securities and that the source and nature of the compensation received in connection with the particular transaction will be furnished upon written request of the customer." 17 C.F.R. 240.10b-10(a)(7)(iii) (1996). This disclosure must be made to the customer at the time the customer opens his or her account. 17 C.F.R. 240.11Ac1-3(a) (1996).

All of the acts giving rise to the instant case occurred prior to the 1995 amendment.

Plaintiffs contend the Act does not preempt state regulation of securities. They argue this is particularly true in light of section 28(a), which provides that "the rights and remedies provided by this title shall be in addition to any and all other rights and remedies that may exist at law or in equity." 15 U.S.C. § 78bb(a) (1994). They further contend that the pre-1995 version ...


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