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Citadel Securities LLC v. Chicago Board Options Exchange, Inc.

United States District Court, N.D. Illinois, Eastern Division

January 12, 2017

CHICAGO BOARD OPTIONS EXCHANGE, INC., INTERNATIONAL SECURITIES EXCHANGE, LLC, NASDAQ PHLX LLC f/k/a Philadelphia Stock Exchange, Inc., NYSE ARCA, INC. f/k/a Pacific Exchange, Inc., NYSE MKT LLC f/k/a NYSE Amex LLC, f/k/a American Stock Exchange LLC, Defendants.


          Robert W. Gettleman United States District Judge

         Plaintiffs Citadel Securities LLC, Ronin Capital, LLC, Susquehanna Securities and Susquehanna Investment Group sued defendants Chicago Board Options Exchange, Inc., International Securities Exchange, LLC, NASDAQ PHLX, LLC, NYSE ARCA, Inc. and NYSE MKT, LLC in the Circuit Court of Cook County, Illinois, seeking to recover fees allegedly improperly charged to and paid by plaintiffs to defendants under certain “payment for order flow” (“PFOF”) or “marketing fee” programs established by each defendant. Defendants have removed the case to this court pursuant to 28 U.S.C. § 1441(a), asserting original and exclusive jurisdiction under 28 U.S.C. § 1331 and/or 15 U.S.C. § 78aa because, according to defendants, the action alleges and seeks relief based on violations of rules promulgated under the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78 et seq., and defendants' duty under that Act to follow those rules. Plaintiffs have moved to remand, arguing that they have alleged violations of state law only, leaving this court without subject matter jurisdiction. For the reasons described below, the motion is denied.


         Defendants are all National Securities Exchanges registered with the Securities Exchange Commission (“SEC”) that operate as self regulatory organizations (“SROs”). As SROs, defendants are part of a comprehensive system adopted by Congress for regulating the securities markets. See In re Series 7 Broker Qualification Exam Scoring Litig., 548 F.3d 110, 114 (D.C. Cir. 2008). The Exchange Act authorizes and requires defendants to adopt rules governing the conduct and administration of the exchanges and their members. See 15 U.S.C. §§ 78f(b), 78s(b). These rules must “provide for the equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities.” 15 U.S.C. § 78f(b)(4). The SEC has broad authority to amend the SROs' rules. 15 U.S.C. § 78s(c).

         Plaintiffs are market maker member firms of defendant exchanges. Plaintiffs allege that during the period in question each defendant exchange ran a “program” under which that exchange collected PFOF fees. PFOF is an arrangement by which a broker receives payment from a market maker in exchange for sending order flow to them. The fees are imposed to attract “order flow” to a market, thereby increasing liquidity and benefitting investors. Defendants have adopted rules creating the PFOF programs under which defendants imposed fees “designed to insure that market makers that may trade with customers on the Exchange[s] contribute to the cost of attracting order flow.” See SEC Concept Release, A Competitive Developments in the Options Markets, 69 Fed. Reg. 6124, 6129 (Feb. 9, 2004). Defendants impose PFOF fees on a market maker when a trade is made for a “customer, ” but not trades made for proprietary “house trades, ” where a firm trades on its own behalf. Plaintiffs allege that over a multi-year period defendants improperly charged PFOF fees on millions of orders not subject to those fees. According to the complaint, those fees were charged as a result of at least two member broker-dealer firms incorrectly marking plaintiffs' orders as “customer orders” instead of “proprietary orders.” The complaint alleges that defendants entered into stipulations under which the broker dealers paid penalties. In the instant action, plaintiffs seek restitution or recovery from defendants of all fees allegedly mischarged.

         This is not the first time plaintiffs have brought these claims. They initially filed suit in the Circuit Court of Cook County, Illinois, on May 22, 2013, alleging that defendants charged PFOF fees “in violation of their own rules.” That original complaint alleged that the amount of allowable fees “is set forth in fee schedules that are noticed, published and approved by the SEC, ” that defendants' activity “violates their own rules and/or fee schedules, ” that plaintiffs “suffered harm because the [defendants] overcharged PFOF fees in violation of SEC-approved fee schedules, ” and that a dispute existed between the parties as to whether defendants “are required to comply with their rules and fee schedules.”

         Defendants removed the original complaint to this court. One month later plaintiffs voluntarily dismissed it. That same day plaintiffs filed a new complaint, again in the Circuit Court of Cook County, Illinois. That complaint attempted to eliminate all reference to any violation by defendants of their own rules, replacing them with allegations that defendants charged fees that were not part of the “PFOF” Program.” Instead of seeking a declaration that defendants “are required to comply with their own rules, ” the complaint sought a declaration that defendants many not “charge PFOF fees on orders that are not part of the Exchanges' PFOF Programs.”

         Defendants again removed the case to this court. Plaintiffs moved to remand, which the court denied. Citadel Securities, LLC v. Chicago Board Options Exchange, Inc., 2013 WL 11319427 (N.D. Ill.Dec. 11, 2013). The court then granted defendants' motion to dismiss for lack of subject matter jurisdiction based on plaintiffs having failed to exhaust their administrative remedies before the SEC. Citadel Securities, LLC v. Chicago Board Options Exchange, 2014 WL 11370439 (N.D. Ill. Aug. 4, 2014). The Seventh Circuit affirmed both decisions. Citadel Securities, LLC v. Chicago Board Options Exchange, 808 F.3d 694 (7th Cir. 2015).

         Plaintiffs then brought a petition for administrative remedy before the SEC, requesting that the SEC order defendants to pay plaintiffs' damages in an amount equal to the PFOF fees that plaintiffs claim were improperly charged. Plaintiffs did not identify any basis for the SEC's jurisdiction in their petition, and in fact expressly stated that the “[SEC] does not have jurisdiction over the market makers' petition pursuant to its Rules of Practice, ” and that the “[SEC] has no statutory authority to exercise jurisdiction over this matter.” Defendants asserted that the SEC had jurisdiction under § 19(h)(1) of the Exchange Act, which authorizes the SEC to institute proceedings to determine whether an SRO has violated any of its own rules and to take appropriate remedial action.

         On July 15, 2016, the SEC issued an opinion explaining why it disagreed with the Seventh Circuit's opinion that the SEC had jurisdiction, and dismissed plaintiffs' petition. In re Petition of Citadel Securities, LLC, et al., 2016 WL 3853760 (July 15, 2016) (the “SEC opinion”). On September 13, 2016, defendant Chicago Board Options Exchange filed a petition for review of the SEC opinion with the Seventh Circuit. CBOE v. SEC, No. 16-3423. Plaintiffs and NASDAQ both moved and were granted leave to intervene. That matter remains pending in the Seventh Circuit. The day after CBOE initiated its appeal of the SEC opinion, plaintiffs filed the instant action. The instant complaint appears to be, with some minor irrelevant differences, the same complaint which this court dismissed previously.


         Plaintiffs' complaint asserts six state law claims. A state claim can be removed to federal court only if the federal court has original jurisdiction unless Congress provides otherwise. 28 U.S.C. § 1441(a); Rivet v. Regions Bank of Louisiana, 522 U.S. 470, 474 (1998). “The presence or absence of federal-question jurisdiction is governed by the ‘well-pleaded complaint rule, ' which provides that federal jurisdiction exists only when a federal question is presented on the face of plaintiff's properly pleaded complaint.” Id. at 475 (quoting Caterpillar, Inc. v. Williams, 482 U.S. 386, 392 (1987)). For proper removal, a right or immunity created by the Constitution or laws of the United States must be an essential element of the plaintiff's claim, Gully v. First Nat'l Bank in Meridian, 299 U.S. 109 (1936), and a case may not be removed on the basis of a federal defense even if both parties admit that the defense is the only question truly at issue. Rivet, 522 U.S. at 475.

         An “independent corollary” to the well-pleaded complaint rule is the principle that “a plaintiff may not defeat removal by omitting necessary federal questions.” Id. (quoting Franchise Tax Board of Cal. v. Construction Laborers Vacation Trust for Southern Cal., 463 U.S. 1, 22 (1983)). If a court concludes that a plaintiff has “artfully pleaded” to omit necessary federal questions, it may uphold removal despite the absence of a federal question on the face of the complaint. Rivet, 522 U.S. at 475. The artful pleading doctrine allows removal where federal law completely preempts a plaintiff's state law claim, id., and where the plaintiff's state law claims “implicate significant federal issues.” Grable & Sons Metal Products, Inc. v. Darue Engineering and Manufacturing, 545 U.S. 308, 312 (2005).

         Defendants' removal is based on 28 U.S.C. § 1331 (federal question), and the Exchange Act's exclusive jurisdiction provision, 15 U.S.C. § ...

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