## Facts

- Thousands of investors sued their broker-dealers—Merrill Lynch, PaineWebber, and Dean Witter—under § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.
- The investors placed **market orders** to buy or sell NASDAQ/over-the-counter securities during the proposed class period (November 4, 1992 to August 28, 1996).
- Defendants acted as NASDAQ broker-dealers and, at times, market makers, and therefore handled customer orders in a market structure where multiple dealers and trading venues could display or provide executable prices.
- Investors alleged defendants owed a **duty of best execution**, meaning they were required to seek the most favorable terms reasonably available when executing customer orders.
- According to investors, defendants followed a routine practice of executing customer market orders at the **NBBO** (National Best Bid and Offer) without adequately checking other reasonably available sources that might have offered price improvement at the time of execution.
- Investors framed the alleged fraud as deceptive conduct and omissions: defendants purportedly held themselves out as providing best execution while using execution practices that did not consistently pursue better available prices.
- Investors claimed economic harm measured by the difference between the price received at execution and the better price they contended was reasonably available for the same order at the same time.
- The investors moved to certify a damages class under Federal Rule of Civil Procedure 23(b)(3). The district court denied certification.
- Investors sought interlocutory review of the denial of class certification in the Third Circuit.

## Issues

1. Whether the proposed class satisfied Rule 23(b)(3) predominance and superiority for § 10(b)/Rule 10b-5 claims alleging a breach of the duty of best execution in NASDAQ market-order executions.
2. Whether reliance and loss causation for the alleged best-execution fraud could be proven with common evidence, or instead required investor-by-investor and trade-by-trade proof.
3. Whether determining breach and damages would require order-specific reconstruction of available prices and execution alternatives at the time of each trade, defeating class treatment.

## Decision

- The Third Circuit **affirmed** the district court’s order **denying class certification**.
- The court held that Rule 23(b)(3) was not satisfied because individualized questions would dominate the litigation, including whether defendants failed to obtain the best reasonably available price for each trade.
- The court reasoned that the best-execution inquiry depends on the circumstances of each order and the alternatives reasonably available at the time, which would require trade-specific proof across an enormous number of transactions.
- The court rejected treating the case like a traditional fraud-on-the-market action, explaining that the alleged wrong concerned order execution quality, not a public misstatement that distorted the market price of the securities.
- The court concluded that reliance, loss causation, and damages could not be established for the class with a single common method; instead, plaintiffs would have to show, for each execution, what better price was realistically available and that the investor’s loss was caused by defendants’ failure to pursue it.
- Given the need for extensive individualized determinations, the court agreed that a class action was not a superior method for adjudicating the claims.

## Legal Principles

- Rule 23(b)(3) requires that common questions **predominate** over individual questions and that a class action be **superior** to other methods; certification may be denied when liability and damages turn on individualized proof.
- A broker-dealer’s duty of best execution requires seeking the most favorable terms reasonably available, and whether that duty was met depends on the facts surrounding each order, including timing, available quotations, and feasible execution options.
- Fraud-on-the-market is tied to public misrepresentations that affect market price; claims focused on execution practices and potential price improvement for particular orders do not automatically qualify for class-wide reliance presumptions.
- When a plaintiff’s theory requires showing that a better execution was reasonably available for each trade, and that the challenged practice caused the worse execution and resulting loss, courts may find predominance lacking because those showings are order-specific.

## Conclusion

In Newton, the Third Circuit affirmed the denial of Rule 23(b)(3) class certification because investors’ § 10(b)/Rule 10b-5 best-execution claims about NASDAQ market orders would require trade-by-trade determinations of whether better prices were reasonably available, whether any investor relied on the alleged deception in a way that caused loss, and how damages should be calculated for each execution, making individualized issues outweigh common ones.


Newton v. Dean Witter Reynolds, Inc., 259 F.3d 154 (2001)