## Facts

- Kenneth E. Newton and other investors traded NASDAQ securities during a proposed class period from November 4, 1992 to November 4, 1994.
- Defendants Merrill, Lynch, Pierce, Fenner & Smith, Inc., PaineWebber Inc., and Dean Witter Reynolds, Inc. acted as NASDAQ market makers and also executed customer orders as broker-dealers.
- NASDAQ operated as an over-the-counter dealer market using an electronic quotation system overseen by the NASD and the SEC.
- Market makers entered bid and ask quotes; the consolidated display produced the National Best Bid and Offer (NBBO), reflecting the highest displayed bid and the lowest displayed offer.
- Private electronic services and trading systems (such as ECN-type services) often displayed prices more favorable than the NBBO.
- Plaintiffs alleged defendants executed customer orders at the NBBO while executing defendants’ own proprietary trades at better prices available through the private services.
- Plaintiffs claimed the better prices were reasonably available for customer orders and that defendants’ practice violated the duty of best execution and constituted fraud under § 10(b) of the Securities Exchange Act and SEC Rule 10b-5.
- The district court granted summary judgment for defendants on the federal securities-fraud claims; plaintiffs appealed, and the Third Circuit heard the case en banc.

## Issues

1. Whether a broker-dealer’s practice of executing customer orders at the NBBO, while obtaining better prices for its own trades through private services, can constitute deceptive conduct actionable under § 10(b) and Rule 10b-5 when better prices were reasonably available to customers.
2. Whether plaintiffs produced enough evidence of loss causation and damages (and related elements necessary to proceed) to create a genuine dispute of material fact and defeat summary judgment.

## Decision

- The Third Circuit (en banc) vacated the district court’s summary judgment for defendants and remanded for further proceedings.
- The court recognized the broker-dealer duty of best execution—generally requiring execution on the most favorable terms reasonably available under the circumstances—and treated plaintiffs’ theory as potentially actionable under § 10(b) and Rule 10b-5 when paired with the required fraud elements.
- Viewing the record in the light most favorable to plaintiffs, the court concluded a reasonable factfinder could determine that better prices were reasonably available through private services, that defendants had access to those prices (and used them for proprietary trading), and that customers were harmed when their orders were executed at inferior prices.
- The court rejected the view that plaintiffs’ proof of loss and damages was necessarily too speculative at the summary-judgment stage, holding that the evidence presented created triable fact questions.

## Legal Principles

- Broker-dealers owe customers a duty of best execution: to use reasonable efforts to obtain the most favorable terms reasonably available in light of the circumstances.
- A best-execution theory is not automatically federal securities fraud; to proceed under § 10(b) and Rule 10b-5, plaintiffs must still prove the familiar elements, including deceptive conduct (misstatement, omission, or scheme), scienter, materiality, reliance, and causation.
- A practice of routinely executing customer orders at NBBO while obtaining better prices for the firm’s own trades may be found deceptive if the firm, with the required state of mind, withholds material information about execution quality or about its order-handling practices.
- Loss causation and damages in an execution-quality case may be shown by evidence that customers received worse prices than they would have received had the broker sought reasonably available better prices; at summary judgment, plaintiffs need evidence creating a genuine factual dispute, not proof beyond dispute.
- On summary judgment, courts must draw reasonable inferences in favor of the nonmoving party; where competing inferences about price availability, execution practices, and resulting price harm exist, the dispute is for the factfinder.

## Conclusion

Newton held that investors could proceed past summary judgment on a § 10(b)/Rule 10b-5 claim premised on alleged failures of best execution where the record could support findings that better prices were reasonably available through private services, that defendants accessed those better prices for themselves, and that customers plausibly suffered measurable price harm when their orders were executed at the NBBO; the Third Circuit therefore vacated summary judgment and remanded.


Newton v. Merrill, Lynch, Pierce, Fenner & Smith, 135 F.3d 266 (1998)