Privacy, Business and Law

On October 13, BNA, Inc.’s Electronic Commerce & Law Report issued a report on a fascinating decision by the United States District Court for the Southern District of California. The case involved is Aaron Abada, on behalf of himself and all others similarly situated v. Charles Schwab & Co., Inc., a California Corporation, and Does 1 through 10, No. 99-CV-0940 K(JAH). The plaintiff filed a state court action in which he alleged that he opened an online trading account with Schwab in reliance on representations at Schwab’s Web site stating “that Schwab would provide fast, high quality executions” and that “[m]arket orders entered while the market is open are subject to immediate execution”.

Plaintiff further alleged that “in light of the large number of Schwab accounts and the rapid rate at which it had been adding new accounts, Schwab knew or should have known that its representations to customers regarding the manner in which their accounts would be handled were false.” Plaintiff claimed that he placed a market order to buy 500 shares of theglobe.com shortly before the market opened on November 13, 1998 and received an order acknowledgment. When the shares hit $50-1/8 later, he reputedly tried to sell but had difficulty accessing his account. When he finally accessed the account, he claimed, he discovered that there was no order confirmation and still later learned that the shares were actually purchased for his account three hours after he placed the order at a price that allegedly was $36 higher than the price at the time he placed the order. He contends that by the time he discovered the purchase price and liquidated the shares, the price of the stock had fallen substantially and he allegedly suffered “substantial losses within his account.” Plaintiff brought a reputed state court class action alleging that Schwab’s actions constituted violations of unfair trade practices under California’s Business & Professions Code, Section 17200 et seq., violations of false and misleading advertising prohibitions contained in California’s Business and Professions Code, Section 17500 et seq., unjust enrichment, and fraud and deceit. Schwab’s counsel removed the case to Federal Court, relying on 15 U.S.C. § 78bb(f)(1) — a provision of the 1998 Securities Litigation Uniform Standards Act. That provision states that “[n]o covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging–(A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security; or (B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.” Plaintiff’s counsel moved for an order to remand the proceeding back to California state court. Finding that the statute has “preemptive force” without regard to whether the state court action asserted any federal claims, the Honorable Judith N. Keep found that the claims fell within the scope of the preemptive portion of the statute because they alleged misrepresentations “in connection with the purchase or sale of a covered security” and were not among the state law actions preserved from preemption under the statute. Thus, plaintiff’s motion to remand was denied. See Abada v. Charles Schwab & Co., ___ F. Supp. 2d ___, 1999 WL 787448 (S.D. Cal. Sept. 7, 1999); Court Proceedings – Securities Regulation: Online Broker’s Representations Fall Within Sweep of Federal Securities Lawsuits Statute, 4(39) Electronic Commerce & Law Rep. (BNA) 921 (Oct. 13, 1999).